MOSL: CHOLAMANDALAM INV & FIN (Buy)-Strong growth trajectory sustains, but margins under pressure

Cholamandalam Inv & Fin: Strong growth trajectory sustains, but margins under pressure

(CIFC IN, Mkt Cap USD3.3b, CMP INR1463, TP INR1700, 16% Upside, Buy)

• Cholamandalam Investment and Finance’s (CIFC) 1QFY19 PAT grew 36% YoY to INR2.9b (under Ind-AS).
• Disbursements increased 45% YoY to INR70b, driven by 48% YoY growth in vehicle finance (VF) and 27% YoY growth in home equity (HE). Note that growth for both these segments, being off a low base, should taper next quarter onwards.
• AUM growth in VF remained robust at 38% YoY, while that in HE picked up to 8% YoY (the highest in five quarters).
• However, margin compression played spoilsport to the growth story. Overall margin contracted 40bp YoY to 7.2%, driven by lower yields and largely stable CoF. Margin pressure was more severe (and unexpected) in VF, where it contracted 130bp YoY (reported basis) to 6.9%. The management alluded to an increase in the share of HCVs and decrease in the share of used vehicle financing resulting in yield pressure.
• Interestingly, the company managed costs well – opex grew only 12% YoY. It is interesting to note that opex in VF was up only 6% YoY, when AUM was up 38% YoY, signifying operating leverage playing out. Note: under Ind-AS, the cost of acquisition gets includes in “interest cost” – however, this would not impact a YoY comparison.