Cholamandalam Investment and Finance Company (CHOLAFIN) – Q3 FY24 Financial Highlights and Analysis

Financial Performance: Cholamandalam Investment

1. Profit and Revenue Growth: Cholamandalam Investment and Finance Company
   • PAT Growth: CIFC’s Q3 FY24 PAT grew by 28% YoY to INR 8.8 billion, in line with expectations.
   • NII Growth: Net Interest Income (NII) witnessed a substantial 36% YoY growth, reaching ~INR 21.7 billion.
   • 9MFY24 PAT: The cumulative PAT for the first nine months of FY24 increased by 30% YoY to INR 23.6 billion.
2. Other Income:
   • Significant Rise: ‘Other income’ surged by approximately 75% YoY to ~INR 4.1 billion.
   • Insurance Distribution: The increase was attributed to the booking of insurance distribution income in the standalone entity after obtaining the insurance agency license.
3. Operating Expenses:
   • YoY Increase: Operating expenses rose by 41% YoY to ~INR 10.6 billion, slightly above estimates.
   • Cost-to-Income Ratio (CIR): CIR increased to ~41%, compared to ~40% in the previous quarter (PQ).
   • Pre-Provision Operating Profit (PPoP): PPoP grew by ~40% YoY to INR 15.2 billion.

Asset Quality and Credit Costs:

1. Asset Quality Metrics:
   • GS3 and NS3: Overall Gross Stage 3 (GS3) declined by ~15bp QoQ to 2.8%, while Net Stage 3 (NS3) remained stable at ~1.6%.
   • PCR: Provision Coverage Ratio (PCR) declined by ~220bp QoQ to ~45%.
2. Credit Costs:
   • Decline: Annualized credit costs decreased to ~1.1% from ~1.3% in the previous quarter.
3. Newer Businesses:
   • Contribution: Newer businesses contributed ~22% of disbursements in Q3 FY24.
   • Underwriting Standards: CIFC tightened underwriting standards in newer businesses to control delinquencies.
   • Future Impact: Higher yields in these segments (CSEL and SBPL) are expected to be RoA accretive from FY25 onwards.

Net Interest Margin (NIM):

1. NIM Stability:
   • Stable NIM: NIM (calculated) remained stable QoQ.
   • Core Spreads: Core spreads (calculated) declined ~15bp to 6.4%, primarily due to an increase in borrowing costs.
2. Future Outlook:
   • Management Expectation: The management does not anticipate a significant rise in Cost of Borrowings (CoB) from current levels.
   • Projected NIM: NIM is projected to be ~6.8% in FY24, expected to improve to 7.0%/7.1% in FY25/FY26.

Outlook and Valuation:

1. Growth Estimates:
   • Disbursement/AUM/PAT CAGR: Estimated CAGR of 24%/27%/31% over FY23-FY26.
   • RoA/RoE: Expected healthy RoA/RoE of ~2.8%/22% in FY26.
2. Recommendation:
   • BUY Rating: Reiterated BUY rating on the stock.
   • Target Price: Revised TP of INR 1,470 (based on 4.0x FY26E BVPS).

Key Risks:

1. Delinquencies:
   • Risk in New Businesses: Higher delinquencies and credit costs in new businesses, especially CSEL.
2. Sectoral Stress:
   • Vehicle Finance Business: Potential pronounced cyclicality despite management efforts to mitigate it.

Management Commentary Highlights:

1. Vehicle Finance:
   • Marginal Book Yield: The marginal book yield in Vehicle Finance is 100bp higher than portfolio yields.
   • NIM Improvement: Expectations of sustained NIM improvement in the near term.
2. Guidance:
   • RoTA Target: Guided for a RoTA (PBT) of 3.5%, aiming to improve RoA from next year onwards.

Conclusion: Cholamandalam Investment and Finance Company’s Q3 FY24 results reflect robust growth, particularly in PAT and NII. The company’s focus on newer businesses and tightening underwriting standards demonstrates a strategic approach. Stable NIM, positive outlook, and the management’s confidence in sustaining profitable growth contribute to the overall positive evaluation. Investors are likely to find value in CIFC’s execution capability and resilience across economic cycles.