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MOSL : CHOLAMANDALAM INV. & FINANCE: Disbursement momentum indicative of strong AUM growth in FY23

.  CHOLAMANDALAM INV. & FINANCE: Disbursement momentum indicative of strong AUM growth in FY23

(CIFC IN, Mkt Cap USD7.6b, CMP INR734, TP INR860, 17% Upside, Buy)

• PAT grew 73% YoY to INR5.7b (in line) in 1QFY23, led by a sequential expansion of ~15bp in NIM, seasonal moderation in the cost-to-income ratio to 2.9% (PQ: 3.5%), and contained credit costs of 1.5% (annualized).
• The sequential decline in margin in the Vehicle Finance business was on account of a higher proportion of new vehicles in the product mix. While the margin profile in the Vehicle Finance business will turn adverse over the next three quarters, it can partly be offset from non-Vehicle Finance segments and higher fee and other income to achieve guided levels of pre-tax RoA of 3.5-4%.
• Newer businesses in Consumer, MSME and SME ecosystem, spawned by CIFC, will exhibit an improving disbursement run-rate, contribute 9-10% to the AUM mix by FY24E, and potentially aid improvement of RoA.
• We model disbursement/AUM/PAT CAGR of 36%/23%/18% over FY22-FY24. We increase our FY23/FY24 EPS estimate by 6%/9% to factor in higher loan growth and fee income. While we estimate a margin compression of ~50bp cumulatively over this period, we recognize that it has levers on OPEX and credit costs to deliver a healthy RoA/RoE of 2.6%/20% in FY24. We maintain our Buy rating with a TP of INR860 (based on 4.2x FY24E BVPS).

 

A sequential improvement in margin, but will turn adverse from 2QFY23

• Both aggregate yields and the cost of funds at the company level were stable QoQ at 13.6% and 6.3%, respectively, leading to stable core spreads of 7.3% in 1QFY23.
• NIM improved by ~15bp QoQ and 10bp YoY to 7.5%. However, we build in a NIM compression over the next three quarters, driven by Vehicle Finance.