MOSL: CHOLAMANDALAM INVESTMENT & FINANCE (INITIATING COVERAGE)-Prepared, Equipped and Armed-On path to become one of India’s finest multi-product lenders
​Cholamandalam Investment & Finance (initiating coverage): Prepared, Equipped and Armed; On path to become one of India’s finest multi-product lenders
(CIFC IN, Mkt Cap USD2.5b, INR1040, TP INR1250, 20% Upside, Buy)
- From a niche vehicle financier, Cholamandalam Investment and Finance Corporation (CIFC) has transformed into a diversified asset finance play, with vehicle finance (VF) now comprising 69% of the loan book, followed by home equity (HE; 28%) and new business segments (home loan/MSME financing; ~3%).
- Over the past five years, CIFC has delivered 20% AUM CAGR, driven by 19% CAGR in VF and 25% in HE. However, EPS compounded at 30% over the same time period. We believe CIFC has built the foundation to achieve 19% AUM CAGR and 23% PAT CAGR over FY17-20.
- CIFC also improved its expense ratio by 60bp to 3.2% over FY12-17, driven by better use of technology. We believe CIFC is well poised to reap further benefits of operating leverage due to better employee productivity, enhanced use of technology for loan sourcing and moderation in recovery expenses. We expect the expense ratio to decline from 3.2% to 2.7% over FY17-20.
- The structural decline in opex ratios following productivity improvement should elevate RoA/RoE from 2.6%/18% in FY17 to 3.0%/20% in FY20. The stock price has consolidated over the past year, which provides an attractive entry point. We initiate coverage with a Buy rating and a target price of INR1,250 (3.2x FY19E BV).
Cholamandalam Investment and Finance Company Limited is a diversified non-banking finance company. The Company provides vehicle finance, home loans and corporate mortgage loans, small and medium enterprises (SME) loans, investment advisory services, stock broking and a range of other financial services. The Company focuses on vehicle finance, corporate finance, home equity loans and distribution of financial products. The Company operates from over 530 branches across India. The Company also offers Rural and Agri Loans, which include loans for purchase of tractors and farming equipment; wealth management, which includes mutual funds, fixed deposits and bonds, life and general insurance, and home loan, and securities, which include stock and derivatives, Internet broking, demat services, exchange traded funds and bonds. Its subsidiaries include Cholamandalam Securities Limited, Cholamandalam Distribution Services Limited and White Data Systems India Private Limited.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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