Results Review for Cholamandalam Investment & Finance Co., Computer Age Management

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By Deepak Shinde

Cholamandalam (NS: CHLA ) Investment and Finance Company: Chola’s Q4FY22 earnings were 18% ahead of our estimates, largely on the back of the reversal of COVID provisions. Consistent with other asset financiers, the stressed pool (GS-II + GS-III) witnessed a sharp sequential reduction to 12% (Q3:16%), led by healthy collections and recoveries and improving economic activity, with NS-III at 2.7% (near the pre-COVID level). Business momentum continued to gain traction, with strong disbursal growth (+58% YoY); new businesses contributed 12% of the mix in Q4FY22. Management remains upbeat about growth prospects across segments, with new businesses significantly scaling up through traditional channels and FinTech partnerships, albeit with similar credit filters as the existing portfolio. We revise our FY23/FY24 earnings by -2%/2% to factor in rising opex intensity and higher AUM growth and maintain BUY with a revised target price of INR788 (4.3x Mar-24 ABVPS).

Computer Age Management Services Lt (BO: COMU ): CAMS reported an in-line revenue (+2% QoQ, similar to other AMCs); however, higher admin and opex led to a 4% sequential dip in core income to INR947mn. MF AAUM witnessed a 1pps dip in market share to 69% alongside continued compression in core revenue yields (albeit milder compression compared to listed AMCs). Market leadership in the duopoly RTA market, significant entry barriers, and high switching costs position CAMS favorably; however, we remain wary of sustained pricing pressure on AMCs spilling over to RTAs in the near to medium term. We build in FY22-24E revenue/operating profit CAGR of 10/12%, led by buoyant equity flows and rising contribution from nascent businesses, including payments, AIF, CRA and insurance. We value CAMS at 42x Sep-23E EV/NOPLAT + Sep-22 cash and investments. We maintain ADD with a target price of INR2,885; the stock is currently trading at FY23E/24E EV/NOPLAT of 37x/32x and P/E of 36x/32x.

Cholamandalam Investment and Finance Company

Back-book near normal; poised for strong growth

Chola’s Q4FY22 earnings were 18% ahead of our estimates, largely on the back of the reversal of COVID provisions. Consistent with other asset financiers, the stressed pool (GS-II + GS-III) witnessed a sharp sequential reduction to 12% (Q3:16%), led by healthy collections and recoveries and improving economic activity, with NS-III at 2.7% (near the pre-COVID level). Business momentum continued to gain traction, with strong disbursal growth (+58% YoY); new businesses contributed 12% of the mix in Q4FY22. Management remains upbeat about growth prospects across segments, with new businesses significantly scaling up through traditional channels and FinTech partnerships, albeit with similar credit filters as the existing portfolio. We revise our FY23/FY24 earnings by -2%/2% to factor in rising opex intensity and higher AUM growth and maintain BUY with a revised target price of INR788 (4.3x Mar-24 ABVPS).

  • Steady P&L outcomes, increasing opex intensity: Chola reported stable NII growth (+10% YoY), in line with AUM growth, as NIMs remained steady at 8.1%. Cost to income ratio increased sharply to 42% (opex-to-AUM at 3.5%) on the back of hiring (1.6K during Q4) and investments in collections and business sourcing and it is likely to stay elevated in the near term.
  • Receding stress pool; normalised credit costs: The aggregate stress pool has nearly halved to 12%, from the Q1FY22 peak of 21%, driven largely by strong collections and recoveries. While reported GS-III/NS-III was at 4.4%/2.7%, GNPA/NNPA as per the RBI’s revised IRAC norms were at 6.8%/4.9% respectively. Given the fact that FY22 loan loss provisions are at 1.2% and the stress pool is receding, Chola’s credit costs are likely to stay muted.
  • New businesses to augment growth; build-out key monitorable: Chola’s three new businesses (retail and SME lending) witnessed strong traction, led by traditional channels as well as digital partnerships. The management remains upbeat about growth prospects, yet it is mindful of the asset quality challenges in some of these new segments. While this is likely to further augment AUM growth, we remain watchful of the traction in these segments, especially because of rising competitive intensity and the evolving nature and limited vintage of its FinTech partnerships.

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