The share price of Cholamandalam Investment & Finance Company has gained over 60 percent in the past six months and foreign broking firm Jefferies believes there are more legs to the rally.
"Cholamandalam Finance's shift towards a more diversified portfolio will result in stronger and less cyclical growth compared to the past. The company's net interest margins (NIMs) are expected to have bottomed out, with a potential lift from a mix shift and upside risk from potential rate cuts," Jefferies said in a report dated July 13.
The company has been trying to diversify beyond its mainstay vehicle finance operations. "As new business scales up, operational leverage gains are projected to offset higher credit costs in new segments and lift returns," Jefferies said.
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The share of auto loans in the company's total loan portfolio is expected to decrease to 53 percent from the current 63 percent. Notably, Cholamandalam Finance has been gaining market share in key segments of the auto loan market, supported by a smaller base and a more diversified auto portfolio compared to its peers. A healthy mix of used vehicles and a higher proportion of less cyclical Light Commercial Vehicles (LCVs) are expected to drive robust growth in auto loans.
Furthermore, Cholamandalam Finance's expansion of Loan Against Property (LAP) and Small and Medium Enterprises (SME) branches, along with new business branches, is set to drive growth in non-vehicle loans. Jefferies forecasts that new business loans will experience a robust 46 percent CAGR over FY23-26, increasing their share of the total loan book to 14 percent by FY26.
Although the average return on assets (ROA) for new business was below 1 percent in FY23 due to the subpar scale, Jefferies expects this to rise to approximately 3.5 percent or higher. The non-bank lender's net interest margins (NIMs) at 6.8 percent are nearing a trough and will experience tailwinds from a mix shift and potential rate cuts, it added.
Any potential rate cuts, though not factored into estimates, could further bolster NIMs. The report suggests that a 50 basis points rate cut could potentially boost earnings per share (EPS) by approximately 8 percent.
Jefferies believes that Cholamandalam Finance's premium valuations will be sustained and continues to consider the company among its top picks. Currently, Cholamandalam Finance is trading at 5.7 times its FY24E book value (BV) and 28 times its FY24E price-to-earnings (PE) ratio, which is above its historical average.
It has price target of Rs 1350 on the stock, implying 15 percent upside from current levels. At 10 am, the stock was quoting at Rs 1,169.50 on the NSE.
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