MOSL: CHOLAMANDALAM INV & FIN (Buy)-Growth surprises positively again; beginning of resolutions in LAP NPLs

Cholamandalam Inv & Fin: Growth surprises positively again; beginning of resolutions in LAP NPLs

(cifc IN, Mkt Cap USD4.0b, CMP INR1650, TP INR1930, 17% Upside, Buy)

• Cholamandalam Investment and Finance’s (CIFC) 4QFY18 PAT grew 32% YoY to INR2.9b, a 6% beat.
• CIFC had another strong quarter on the vehicle finance front. Disbursements grew 55% YoY and AUM grew 33% YoY. At the same time, GNPL ratio in this segment declined 74bp QoQ to 2.04%. This is lower than even the number reported on 180dpd basis in FY15.
• The home equity segment has stabilized. While disbursement growth on a YoY basis looks optically high at 48%, it is merely due to the low base effect. Otherwise, disbursements have largely been around INR8b in the past three quarters. More importantly, there have been some resolutions under SARFAESI due to which the GNPL ratio declined 60bp YoY to 5.4%.
• While yields were largely steady, a 40bp/70bp QoQ/YoY decline in CoF drove a similar improvement in margins. As incremental CoF is similar to on-book CoF at 8.2-8.3%, we believe there is no scope to further reduce CoF.
• Overall, CIFC generated an RoE of 23% for 4QFY18 and 21% for FY18. Over the past three years, it has delivered 25% disbursement CAGR, 19% AUM CAGR and 31% PAT CAGR.
• Valuation and view: CIFC has a well-diversified portfolio, both geographically as well as product-wise. It is expanding into newer segments like home loans and MSME financing. With strong branch expansion, focus on new products and improvement in the broader economy, we expect AUM to register high-teens CAGR over the medium term. The improvement in margins is encouraging. We increase our FY19/20 estimates by 4-5% and re-iterate Buy with a TP of 1,930 (4x FY20E book).