Dolat Capital is bullish on Cholamandalam Finance has recommended buy rating on the stock with a target price of Rs 1461 in its research report dated November 03, 2017.
Dolat Capital's research report on Cholamandalam Finance
Q2FY18 stood a healthy quarter for the company in terms of profitability led by strong disbursement growth (across the vehicle and home equity), lower interest expense and lower provisioning. Q2FY18 was characterized by steady disbursements momentum, the right blend of AUM mix and supportive macros. Given the margins sustainability driven by robust asset mix coupled with HE credit risks at back burner now, we tweak our NII estimates by 4% in FY18 and 1% in FY19E. This accompanied with improving credit costs (23bps lower than earlier guidance of 30bps), we incorporate 4%/5% increase in FY18/FY19 PAT. PAT at ` 2.23bn (in-line with our estimate of ` 2.06bn) up by staggering 33% YoY largely led by Vehicle finance loan traction (32%+ YoY disbursements) and lower provisioning (shrunk 15% QoQ). Home equity disbursements are back in reckoning reporting 12% QoQ growth putting behind demonetization worries. Disbursements grew by 24% in Q2FY18 and in-line with a management strategy to focus on the select home loan portfolio, vehicle and MSME loans. NII stood at ` 7.4bn (almost in-line with our estimate of ` 7.2bn) grew 25% YoY and 6.5% QoQ led by lower interest expense (up 2.9% QoQ and declined 2.2% on YoY). Net Interest Margin (NIM) was up at 9.6% for the quarter, compared to 8.4% in the same quarter last year led by rich product mix and improved funding costs. GNPA and NNPA (on 3 months overdue basis) stood improved at 4.46% and 2.89% respectively compared with last quarter with a continued enhanced focus on collections.
Diversified loan mix, improving operating leverage, moderating credit costs trends coupled with early shift to 90 dpd NPA recognition norms & provisioning buffer, capital sufficiency (Tier I at 14.27%) and the dilution free growth should imply superior return profile for CIFC (ROAs at 2.5%+, ROEs at 19% by FY19E). With management change overhang behind and Mr. Srinivasan at the helms now, the healthy legacy remains and CIFC stands on track to emerge as one of the strongest asset financing NBFC. Against this backdrop, we maintain our target multiple at 4.3x P/ABV FY19E arriving at a price target of ` 1,461. REITERATE BUY.
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