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Suresh Krishnamurthy

Mr M. Anandan, Managing Director.

FRESH exposure can be considered in the stock of Cholamandalam Investment and Finance Company with a long-term perspective. The stock valuation is attractive and an investment could offer an exposure to the rapidly-growing truck financing business. Over the long term, the growth of its asset management and securities-broking subsidiary could add value.

The potential is, however, not reflected in the valuation. Even as the prices of a number of non-banking finance companies have risen sharply, that of the Cholamandalam stock has stagnated. The company's credentials are, however, relatively superior to many NBFCs.

Impressive record: Cholamandalam has been in the business of financing since 1978; it entered vehicle funding in the 1990s. It was also affected in the slump in fortunes after 1997, but managed a smart recovery. It is one of the few NBFCs to take advantage of the growth in the vehicle financing segment since 2001. Profits during 2001-2004 rose at a compounded annual rate of nearly 40 per cent.

The company has also forayed into asset management and securities broking. The contribution of these ventures is negligible as of now. The company also has a subsidiary — Cholamandalam Distribution — that distributes financial products — another growing business segment. Despite including the investments in these ventures, which are yet to pay off, the return on net worth is a steady 15 per cent.

The company's standalone profits have stagnated this fiscal. Cholamandalam has, however, said that disbursements in automobile financing have grown by 25 per cent. For the nine months ended December 2004, the gross asset base grew only by 13 per cent. Cholamandalam is also getting out of financing two-wheelers and tractors. This would have restricted the asset base growth. Besides, in a rising interest rate environment, the net interest income would also have been affected.

The company reported a 6 per cent rise in `profits before tax and exceptional items'. The per share earnings declined relatively more because of the equity expansion in May 2004. The prospects for vehicle financing, however, remain bright. Specifically, the demand for truck financing will grow rapidly if the expected investments in roads happen. Cholamandalam can be expected to take advantage of the growth, having been in the business for long.

Attractively valued: Cholamandalam has consistently paid large dividends. In the last three years, it declared a dividend of Rs 5. With the company expected to end the year with earnings per share of Rs 10, the prospect for a dividend of Rs 5 for this financial year is bright. That would work out to a yield of nearly 6 per cent. The stock also trades at a price-to-earnings multiple of about eight times. Its book value is also higher than the share price. The stock holds potential to deliver reasonable returns to a patient investor.

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