Why you should accumulate shares of Cholamandalam Investment & Finance

Hamsini Karthik |BL Research Bureau | Updated on: Mar 12, 2022

Ability to diversify and stay nimble augur well for the company whose stock trades at Rs 670 levels

Being a specialist in a trade has its advantages. This has helped Shriram Transport Finance cement its leadership position in the truck financing space. The flip side is the vulnerability to market downturns, cyclicality of which has increased in the past decade. So, it pays to have presence across the board with an opportunity to harvest on the existing customer base.  Cholamandalam Investment and Finance Company (CIFC) is one such example.  It has neatly captured the diversification theme within the vehicle financing segment much ahead of even the pandemic. 

Its asset size, at Rs 72,700 crore lags its immediate peer, Shriram Transport (Rs 1,13,600 crore) but better than M&M Financial Services (Rs 58,300 crore) as on December 31, 2021. However, it leads the pack when gauged on growth potential, loan book quality and return profile. For this reason, CIFC stock has traded at a premium to competition – 4.8x 12-month trailing price-to-book. In fact, while peers have corrected by 12 – 16 per cent year-to-date, CIFC has held up well gaining 16 per cent during this period. That a three-way merger is ongoing at the Shriram group (which also involves Shriram Transport) and M&M Finance has been ceding its loan base since the pandemic has worked advantageously for CIFC.  Investors can accumulate this stock. 

Agile model 

From used commercial vehicles (CVs) to new CVs, cars and tractors, CIFC’s strength is its wide range of portfolio in the vehicle finance space. The diverse product spread has helped mitigate the slowdown in a certain segment and cash-in on the other where demand is holding up. 

CIFC’s agility worked well in FY19 – 20 when the passenger cars demand was stronger than CVs. In fact, during FY16 – 21 CIFC’s loan book grew at 19 per cent CAGR as against 10 per cent posted by Shriram Transport and M&M Finance. Industry average growth for vehicle financiers was 15 per cent during this period. From nine per cent market share in CV space, CIFC’s presence has increased to 12 per cent by December 2021 quarter (Q3). The good part is that the growth hasn’t come at the cost of asset quality. 

At 5.9 per cent gross stage-3 loans (or non-performing assets; NPA) in Q3, CIFC has held up well compared to peers. CIFC’s 5-year gross NPA average at 3.7 per cent stands strong against Shriram Transport and M&M Finance’s nine per cent and 10 per cent respectively. The lender’s ability to grow ahead of competition, without compromising on the asset quality has helped it garner top-notch asking rates. To further diversify its base the company has entered three verticals. 

New businesses 

Lending to small and medium enterprises (SMEs) is gradually moving away from banks to non-banks, and to capture this shift and dig into its existing customer reach, CIFC entered into three business verticals in the current quarter – SME Loans, secured business and personal loans, and consumer and small enterprises loans. While SME loans will be a mix of secured and unsecured lending, its targeted at funding short-tenure receivables. Secured business and personal loans are intended at the informal sector such as self-employed non-professionals (shopkeepers, carpenters etc.) with a tenure of 4 – 5 years. The last category is aimed at self-employed professions such as doctors, chartered accountants, small businesses and traders and these loans are largely unsecured. On a blended basis, CIFC plans to increase its quarterly disbursements by 10 per cent. The likely yield on these loans is pegged to be higher by 300 – 600 basis points from the current 14 per cent mark. 

In addition, CFIC has tied up with Bank Bazaar, Paytail and Kreditbee to penetrate its digital lending base and has made a strategic investment in Payswiff which is a POS provider with a merchant base of three lakh SMEs. 

Risks to consider

While the new loans are designed to generate high return on assets, CIFC is entering a thickly populated ecosystem where Bajaj Finance has held its forte despite competition. Can CIFC match existing interest rates without compromising on its risk management framework is a big question, given that it will be taking exposure to unsecured lending. Further, with 80 per cent of its branch presence in the rural areas where demand is yet to bounce back, how much of the targeted growth can be met in the current calendar year will be interesting to watch. 

There’s also the risk of the demand for passenger vehicles not bouncing back yet. Demand recovery has been pushed back quarter after quarter for almost a year. For now, its largely the CV segment that’s holding up. But with a likely increase in fuel and operating costs, how well the space plays out is another monitorable. 

Historically, CIFC has commanded premium valuations for its ability to balance between growth, profitability and asset quality and it has bettered competition on these fronts. The silver lining is that the new book may not account for more than 10 per cent of total loans in the initial years. So, the cost of bad loans may not be enormous even assuming a normalised industry gross NPA rate of 2.5 per cent. 

However, at the current levels, the stock trades at a very thin margin for error. 

Published on March 12, 2022
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