Cholamandalam rating: Retain ‘buy’ with target price of Rs 262

Chola reported massive market share gains as the momentum of new disbursements witnessed an improving trend especially in tractors, new passenger vehicles, two wheelers and used vehicles.

Cholamandalam (Chola) delivered a comprehensive beat on PAT (Rs 4.3 billion vs I-Sec: Rs 2.7 billion) despite minor miss on operating profit. This was primarily because of lower credit costs of Rs 562 million, down 49% Y-o-Y. Chola exuded confidence in the adequacy of its Covid/macro provisions and chose not to make additional accelerated provisions in Q1FY21. Cumulative Covid/macro provisions stood at ~87bps of AUM. Asset quality improved 50 bps Q-o-Q, primarily led by write-offs (>Rs 1.2 billion) of some fully provided assets. Moratorium was broadly unchanged (~74%) except that ~50% moratorium customers have made partial or full EMI payments.

Chola reported massive market share gains as the momentum of new disbursements witnessed an improving trend especially in tractors, new passenger vehicles, two wheelers and used vehicles. We see an opportunity for Chola to deliver industry-leading asset quality and lower credit costs in an otherwise tough fiscal year. Maintain ‘buy’ with a target price of Rs 262 (2.0x FY22E P/BV).

Has Chola under provided/ adequately provided and is this a statement of confidence in its superior underwriting and collections? While one might think (we were no exceptions) Chola should have made aggressive provisioning even in Q1FY21 to build a higher cushion, we get comfort from the fact that Chola has historically always remained conservative and erred on the side of caution. While it is only natural to compare Chola’s aggregate Covid/macro provisioning buffer (~87bps) with its close peers, it should be seen in the context of Chola’s consistent delivery of superior asset quality and through-cycle lower credit costs.

Management highlighted it had the benefit of knowing about extension of three-month moratorium before it arrived at Covid/macro provisions made in Q4FY20.