As Cholamandalam Finance’s resilience is put to test, investors turn wary

In essence, the company has recovered swiftly from the initial blow of the pandemic. But whether it can ride the second wave just as well is a concern among investors.Premium
In essence, the company has recovered swiftly from the initial blow of the pandemic. But whether it can ride the second wave just as well is a concern among investors.
 2 min read . Updated: 12 May 2021, 10:26 AM IST Aparna Iyer

Cholamandalam Investment and Finance Company Ltd has weathered the pandemic far better than peers in FY21, and investors have rewarded the company by making its shares outperform the broad market. But will the Murugappa Group’s vehicle financier be able to do a repeat performance in FY22?

Investors don’t seem to be so sure about the company coming unscathed from the second wave of the pandemic and even the company’s management sounded cautious on the outlook. The company said its disbursements were affected in April and May due to the second wave. Shares of the lender have dropped 4.5% since it announced it March quarter results on Friday. As such, the quarterly performance showed signs of emerging stress, and growth coming under pressure. Disbursements in its mainstay vehicle finance segment remained flat sequentially, keeping the overall disbursals largely unchanged. Note that disbursements had recovered sharply in the previous two quarters after the first three months of FY21 was hit by lockdowns. In essence, the company has recovered swiftly from the initial blow of the pandemic. But whether it can ride the second wave just as well is a concern among investors. “While disbursements would be muted in H1FY22 due to the second covid wave, we expect them to pick up thereafter," analysts at Motilal Oswal Financial Services wrote in a note.

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On asset quality too, initial signs of stress have emerged. The lender’s stage three assets or bad loans were 3.96% of its book, higher than 3.75% in December quarter. Its restructured loan pile is near 2% of its loan book. Analysts at Emkay Global note that asset quality may remain volatile in the June quarter due to lockdowns triggered by the second wave. While the provision coverage ratio 44.3% should give comfort, the ratio is down from FY20 levels. To be sure, the lender increased provisions for the March quarter.

What works for Cholamandalam Finance is its healthy liquidity position. Also, the management said it has beefed up its collection efforts by hiring personnel. The company’s collection efficiency was back to pre-pandemic levels in March and remained high at 93% for April, according to the management. That said, collections in its vehicle finance segment remain a concern.

Despite these emerging troubles, Cholamandalam Finance looks superior when compared with peers. Its FY21 metrics trump that of rivals, a reason behind the premium valuations. For these valuations to stick, the lender would need to keep this distinction intact.

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