Prabhudas Lilladher recommended accumulate rating on Cholamandalam Investment and Finance Company with a target price of Rs 240 in its research report dated July 31, 2020.
Prabhudas Lilladher's research report on Cholamandalam Investment and Finance Company
CIFC Q1FY21 earnings stood mixed. While we laud enhanced disclosures on morat bucket-wise and market share gains in key businesses (tractor and other high yielding products) coupled with decent PPoP (21%QoQ growth and mere 1% YoY decline), we maintain certain reservations on morat picture. Morat disclosures indicate (a)mere 4% customers’ repayments came in full (c) 34% paid either 1 or more EMIs (d) 16% have paid in part. What also stood slightly unjustified is mere Rs0.6bn specific provisions for quarter despite acknowledgement of uncertainty over earnings potential of customers. Said that, Co. did front-load provisions to the tune of Rs2.8bn in anticipation of increased LGDs for stage 3 assets in Q4FY20. While liquidity sufficiency (Rs60bn cash on BS) is expected to maintain ALM positioning over morat period, our apprehensions emerge from elongated asset quality downcycle exasperated by lower utilization levels and tepid demand. While FY21 estimates have been tweaked marginally higher as provisions fall in line, we maintain FY22-23 estimates incorporating weak growth cycle (4-12%), NIM compression (5-6%) and NPA jump (4-5%) over FY21-22E. While FY21 return profile takes a beating (RoE:6%/RoA:~1%), CIFC’s continued focus on right product positioning and conservative strategy place the Co. on revival mode. Resultantly, FY22/23 RoE/RoA bounce back to 15-16%/2-2.2% levels respectively.
Outlook
We, therefore, maintain ACCUMULATE rating on the stock and rollover target multiple to Sep-22 estimates at 2.0x PBV arriving at a price target of Rs240.
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