Stock recommendation for Cholamandalam Financial Holdings (CFHL) by IIFL

Stock recommendation for Cholamandalam Financial Holdings (CFHL) by IIFL. The recommendation highlights several factors that make CFHL an attractive investment. Here’s a summary of the key points:

1. Strong Growth Momentum:

• CFHL has shown strong growth momentum with a 40% to 50% Year-over-Year (YoY) growth in Assets Under Management (AUM) and disbursements.
• Growth is expected to continue at a 27% Compound Annual Growth Rate (CAGR) over the next 3 years. This growth will be driven by distribution expansion, particularly in Home Loans (HL) and Loan Against Property (LAP), and the scale-up of new businesses.
• Margins are expected to recover, partly due to higher yields from new business and a 30bps rate hike in July.

1. Room for Continued Distribution Expansion:

• CFHL’s distribution expansion strategy has been successful in growing LAP and affordable home loans by 29% and 60% YoY, respectively.
• There’s still room for growth as LAP and Home Loans are currently distributed from only 49% and 42% of VF branches.
• The management believes that affordable home loans have significant growth potential due to under-penetration in the segment.

1. Steady-State New Business ROAs:

• Management is confident that new businesses will have higher Return on Assets (ROAs) compared to the FY23 ROAs of 2.9% of AUM.
• Analysis suggests that the new business portfolio could have 100-130bps higher ROAs.

Outlook and Valuation:

• The recommendation maintains a “Buy” rating for CFHL due to its sector-leading growth driven by new businesses and distribution expansion for existing products.
• CFHL’s valuation is considered attractive with a Price to Earnings (PE) ratio of 12.5x compared to an industry average of 23.4x and a holding company discount of ~56% with CFHL Consumer Finance (CIFC).
• The target price for CFHL is set at Rs 1080.

Technical Analysis:

• The stock’s technical analysis suggests a bullish trend with higher highs and higher lows on the daily chart.
• MACD (Moving Average Convergence Divergence) is approaching the signal line and the 0-line, indicating an increase in bullish momentum.
• The daily RSI (Relative Strength Index) is above the 50-level mark, further supporting the bullish outlook.

This recommendation seems to be positive about CFHL’s growth prospects, valuation, and technical indicators. However, it’s important to remember that investing in stocks carries inherent risks, and it’s crucial to do your own research and consider your investment goals and risk tolerance before making any investment decisions. Consulting with a financial advisor is also advisable for personalized guidance.

Download the detailed analysis document from here