MOSL: CHOLAMANDALAM INV & FIN (Buy)-Strong quarter-HE getting back on track

​Cholamandalam Inv & Fin: Strong quarter; HE getting back on track

(CIFC IN, Mkt Cap USD2.9b, CMP INR1179, TP INR1400, 19% Upside, Buy)

Cholamandalam Investment and Finance's (CIFC) 1QFY18 PAT grew 25% YoY to INR2.07b, beating our estimate by 5%, largely driven by stronger-than-expected margins (7.9% v/s 7.3% YoY).

The strong margins performance was driven by lower CoF, higher share of securitized assets, increased share of VF v/s HE, and lower borrowings-to-loans ratio. The securitized loan book increased 6% QoQ to INR66b. In the past 5-6 years of disclosing quarterly numbers, this book has always declined QoQ (4Q is always strong as banks rush to meet PSL norms). For the first time, the off-BS book increased sequentially in 1Q. This was a big delta for margins, in our view. Additionally, on-book loans grew 6% YoY, but borrowings increased only 3% YoY. Consequently, margins improved by 25bp (as per our calculation).

Disbursements in LAP have recovered from 4QFY17 lows, but are still below pre-demon levels. Hence, AUM growth in LAP was just 4% YoY. VF disbursements grew by 15% and AUM by 17% YoY. However, management is confident of achieving 18-20% overall disbursement growth for the year.

Other takeaways: (1) 50bp YoY decline in expense ratio in the VF segment and 20bp in LAP (major part of our thesis). (2) Credit costs in the LAP segment have finally begun to decline (20bp YoY and 40bp QoQ). (3) Margins in LAP remain under pressure (-40bp QoQ, 50bp YoY).