Cholamandalam Investment and Finance Company Limited (CIFC), was incorporated in 1978 as the financial services arm of the Murugappa Group. CIFC, which commenced business as an equipment financing company, has transformed into a comprehensive financial services provider offering vehicle finance, home loans, home equity loans, SME loans, investment advisory services, stock broking and distribution of financial products. CIFC operates through 534 branches across India with assets under management of ~INR 300bn. CIFC has customer base of over 7.5 lakh and total employee strength of 13590.
Growth momentum intact; to be driven by used & HCV loans
The company expects to grow its loan assets by >20% which will be primarily driven by used assets and HCV. However, CIFC is not targeting to increase the share of any particular product line as CIFC tries to cater to the demand of its target customer base which helps it to adjust to the changing demand pattern particularly in the vehicle finance segment. In the home equity segment, CIFC has slowed down its disbursement due to increased competitive intensity. However, growth in disbursement will be maintained in the range of 10-15% as it expands its footprint in newer areas. Currently CIFC offers LAP facility only at 92 branches of the total 540 branches.
NIM to be supported by reduction in cost of funds
In FY16, NIM expanded by ~45bps to 8.36% driven by reduction in cost of fund and increase in fee income. In the near term, reduction in bank base rate/MCLR will help the company to maintain NIM at current levels as bank borrowings still constitutes 55% of the total borrowings. Over long term, CIFC is targeting to bring down the bank funding and increase the direct borrowing (Debentures) to 35% each while the rest coming from CP (15%) and tier II (15%). Debentures currently constitute 21% of the total borrowings.
OPEX reduction driven by higher disbursals and improved collection
Expense ratio has remained constant at 3.4% for last 3 years but improved to 3.2% in Q4FY16 driven by higher disbursals and improvement in collection. The company expects this trend to continue as operating leverage plays out on back of higher disbursals, lower collection cost and improved efficiency (rolling out of tablets). The company has engaged Cognizant as an IT partner to implement standardized processes to bring down expense ratio. In the long term, the company is targeting to bring down expense ratio to 2.5%.
Credit cost to improve on back of CV cycle recovery
Aided by recovery in CV cycle, CIFC has witnessed marked improvement in asset quality. GNPA/NNPA came to 3.5%/2.1% in Q4FY16 from 4.3%/2.8% on 120 dpd. As a matter of prudence, CIFC has created additional provision to the tune of INR 524mn for complying with the requirement of transition to 90 dpd by March 2018. On back of improved financials of truck operators, the company expects credit cost to decline by 20-30 bps in FY17. We do not expect any substantial reduction in credit cost as the company improves its PCR which is currently at 40%.
Outlook & Valuation
CIFC is one of the beneficiaries of recovery in CV cycle with vehicle finance witnessing disbursal growth of 32% in FY16 compared to 8% CAGR over FY13-16. Driven by higher operating leverage, CIFC witnessed improvement in all operating parameters.NIM improved by 44bps YoY to 8.4%, expense ratio remained stable at 3.4% but declined to 3.2% in Q4FY16 and credit cost was at 1.7% compared to 1.8% in FY15 despite CIFC moving to 120 dpd. CIFC, which doubled its branch network between FY12-16 (reason for high OPEX), should enjoy higher operating leverage and report higher profit compared to 23% CAGR reported over FY13-16.The company targets to open 100 more branches in FY17. The management expects home loans business to grow aggressively in coming years and reach the size of its Home Equity business (LAP) over a five year period, thereby lowering its dependence on vehicle finance business. Driven by buoyancy in business, normalization of OPEX and credit costs from the current peaks levels, CIFC is targeting to achieve post tax RoA of 3% in three years from current RoA of 2.2%. This should help CIFC to achieve RoE of ~20% assuming leverage of 7x. At CMP, the stock is trading at 4x its FY16 BVPS.
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