Religare is bullish on Cholamandalam Investment and Finance Company and has recommended buy rating on the stock with a target of Rs 850 in its October 29, 2015 research report.
Religare's report on Cholamandalam Investment and Finance Company
Cholamandalam Investment and Finance Company’s reported Q2FY16 PAT increased by 27% YoY to Rs 1.2bn, largely on account of 21% growth in NII and well managed operating expenses (up 10%). Disbursement growth was strong at 21% YoY while AUM growth remained steady at 10% YoY. The company migrated to 120dpd NPA recognition norms, well ahead of the regulated timeline, which is encouraging in our view. This led to an increase in GNPA to 4.4% in Q2 from 3.3% in Q1. Maintain BUY with a Sep’16 TP of Rs 850.
NPAs rise on migration to 120dpd recognition norms: GNPA/NNPA increased to 4.4%/3.1% from 3.3%/2.1% in Q1 as CIFC migrated to 120dpd NPA recognition, six quarters ahead of the regulatory requirement. Accordingly, additional provisions to the tune of Rs 536mn were made towards income de-recognition (Rs 170mn) and increase in standard asset provisions to 35bps (Rs 120mn). GNPA on a comparable basis (150dpd) was up a mere 6bps QoQ to 3.4%.
Disbursement picks up pace while AUM growth remains steady: CIFC’s disbursement growth was strong at 21% YoY in Q2, largely driven by 27% YoY/8% QoQ growth in the vehicle finance segment. Despite the strong disbursements, AUM growth was fairly steady at 10% YoY. The home equity business continues to do well, growing at 25% YoY, while the vehicle finance portfolio grew by 4% YoY.
Margins improve 90bps YoY: NIM improvement to 8.5% in Q2 was led by a change in loan mix in favour of high-yield used vehicle loans, a reduction in cost of funds due to a shift to market borrowings and better traction in collections. NIM of the vehicle finance business increased by 120bps YoY to 8.1%.
Maintain BUY: We expect CIFC to post a strong earnings CAGR of ~26% over FY15-FY18 and a steady improvement in ROA, which should drive a re-rating going forward. Maintain BUY with a Sep’16 TP of Rs 850.
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