Hong Kong-based brokerage CLSA revised its rating on Cholamandalam Investment & Finance, citing inflated valuations, which now closely resemble those of the market leader, Bajaj Finance.
On April 22, CLSA downgraded Cholamandalam to ‘hold', with a fresh target price of Rs 1,600 per share. The NBFC stock now trades at 4x its P/B Ratio, which is just a 9 percent discount to the market leader Bajaj Finance.
At 9.45 am, shares of the NBFC were quoting Rs 1,613.4 on the NSE, lower by 2.8 percent compared to the previous session’s closing price.
The NBFC has rarely traded at such lofty valuation multiples, levels that have historically been justified only during periods of exceptionally strong asset under management (AUM) growth: typically in the 30 to 40 percent range.
However, CLSA analysts suggested that such growth rates are unsustainable in the near term. They project a more moderate CAGR of 18–20 percent over the next two years, indicating a normalisation in performance as the company matures. This cautious outlook casts doubts on whether the current valuation is justified, given the anticipated slowdown in growth momentum.
Cholamandalam is expected to benefit from a rate cut cycle, however CLSA cautioned that the impact could be modest. An additional cut of around 25 basis points would merely enhance its NIM by 7 to 8 basis points and their EPS by ~2 percent, it said.
Over the past year, Cholamandalam Finance’s shares have surged over 40 percent, outperforming most peers. This sharp outperformance has also resulted in valuation concerns. During this time, the benchmark Nifty 50 index has given investors returns of around eight percent.
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