Buy Cholamandalam Finance; target of Rs 1681: HDFC Securities

HDFC Securities' research report on Cholamandalam Finance

In the midst of the systemic crisis of confidence faced by NBFCs, we expected polarization to increase (Refer: Not all in the same boat), resulting in increasingly divergent performance, with good players getting better at the expense of others. CIFC, with its strong parentage, granular and diversified B/S profile has emerged stronger. 3QFY19 results and our recent interaction with the mgt are indicators of the same. CIFC’s atypical diversification across segments (new/used VF, HE and others) and geographies (not more than 15% AUMs in a single state), conservative borrowing mix and superior asset quality (G/NNPAs: 2.7/1.5%) have and will enable it to outperform peers.

Outlook

Asset quality improvement can be expected in both the VF (despite being one of the best) and HE segments as SARFAESI recoveries gather pace. The mgt thus targets pre-tax RoAAs of ~3.6-4%. Maintain with a TP of Rs 1681 (3.25x FY21E ABV of Rs 517).