MOSL: CHOLAMANDALAM INV & FIN (Buy)-Growth trajectory to moderate, but margins under pressure

CHOLAMANDALAM INV & FIN: Growth trajectory to moderate, but margins under pressure

(CIFC IN, Mkt Cap USD2.7b, CMP INR1269, TP INR1525, 20% Upside, Buy)

• Cholamandalam Investment and Finance’s (CIFC) reported 2QFY19 PAT of INR3.04b (+49% YoY), 6% ahead of our estimates. While operating profit came in 4% below estimates, PAT beat was driven by lower than expected credit costs.
• Growth remains robust – Disbursements were up 26% YoY to INR69b driven by 29% YoY growth in vehicle finance (VF) and 10% YoY growth in home equity (HE). Consequently, AUM was up 31% YoY to INR477b, with VF AUM up 38% YoY to INR354b. Management has guided to moderation in disbursement growth in 2HFY19 citing the high base.
• However, spread compression played spoilsport to the growth story. Calculated spreads declined 60bp YoY to 5.8% driven by strong margin compression (down 80bp to 13.7%). This is despite the fact that the share of VF (which is high-yielding) has increased from 70% to 74% YoY.
• Interestingly, the company managed costs well – opex grew only 7% YoY. Credit costs almost halved on a YoY basis to INR612m. Interestingly, credit cost for the HE segment was minus 153m due to recoveries from SARFAESI.
• CIFC raised INR50b in the last week of September to manage liquidity. Cost of funds could go up by 30-40bp during 2HFY19.