Cholamandalam Inv. & Fin. Co.

Transcription

1 Initiating Coverage NBFC January 19, 2017 Cholamandalam Inv. & Fin. Co. Enough catalysts for fuelling growth Cholamandalam Investment & Finance Company (CIFC), part of the Murugappa Group is one of the dominant players in the Vehicle Finance business with a market share of ~9%. Focused business model, strong management and high corporate governance standards are the key differentiating parameters of CIFC. Balanced portfolio, without much concentration risk: While CIFC is largely known as a Vehicle Financing NBFC, over the years it has diversified and ramped up its business in Loan Against Property. Further, Vehicle financing segment which was ~73% of its AUM in FY2012 had been brought down to 67% during FY2016, while the share of LAP has been raised to 30% v/s 23% during the same period. What is important is that, while LAP continued to be an area of focus, the management never lost its focus on Vehicle Finance. Expect AUM CAGR of 16% over FY : CIFC s consolidated AUM has grown by an impressive 26.7% over FY , backed by 27.3% CAGR in Vehicle Finance and 32.9% CAGR in LAP segment over the same period. While demonetization has impacted the demand scenario, we expect growth to bounce back in 2HFY2018 and believe that Cholamandalam can deliver 16% CAGR in AUM over FY , backed by incremental demand for CV. However, the management could choose to go slower on the LAP portfolio. Asset quality concerns relatively low v/s other NBFCs: CIFC has been able to maintain a strong asset quality despite high growth. The rise in GNPAs in FY2016 was due to migration to 4 months NPA recognition norm v/s 5 months earlier (on a like to like basis GNPA was under control). At the end of FY2016, on 4 months basis GNPA was at 3.35%, while it would have been around 4.3%-4.4% on 3 months basis. As visible from Q1FY2017 & Q2FY2017, we don t expect material deterioration in the asset quality in the medium term. Strong ROE backed by efficient mix of source of funds and cost rationalization: CIFC has reduced the source of bank loans from 52.4% in FY2015 to 49.3% in FY2016, which was further reduced to 39.4%. Judicious mix of funds and cost rationalization has enabled in five year average RoE of 17.4%. We expect the company will be able to maintain its historical RoE trend in the long run. Outlook & Valuations: Cholmandalm is best placed to play the revival in CV cycle in India. With the pain of demonetization getting over, we expect gradual uptick in freight availability and consequent CV sales. Further, the lower interest rate regime could fuel a growth in passenger vehicle and tractor business. Currently the stock trades at 3.2x its FY2019E ABV. We recommend BUY on the stock with a target price of `1,230. Key Financials (Standalone) Y/E March (` cr) FY2014 FY2015 FY2016 FY2017E FY2018E FY2019E NII 1,129 1,376 1,737 2,012 2,317 2,711 % chg Net profit ,008 % chg NIM (%) EPS (`) P/E (x) P/ABV (x) RoA (%) RoE (%) ; Note: CMP as of January 18, 2017 BUY CMP `1,000 Target Price `1,230 Investment Period 12 Months Stock Info Sector NBFC Market Cap (` cr) 15,645 Beta Week High / Low 1244/583 Avg. Daily Volume 47,687 Face Value (`) 10 BSE Sensex 27,258 Nifty 8,417 Reuters Code CHLA.BO Bloomberg Code CIFC@IN Shareholding Pattern (%) Promoters 53.1 MF / Banks / Indian Fls 16.7 FII / NRIs / OCBs 17.8 Indian Public / Others 12.5 Abs.(%) 3m 1yr 3yr Sensex (2.8) Cholafin (15.8) Year Daily Price Chart Siddharth Purohit Ext: 6872 siddharth.purohit@angelbroking.com Please refer to important disclosures at the end of this report 1 1,400 1,200 1, Jan-14 Aug-14 Mar-15 Nov-15 Jun-16 Jan-17

2 Investment rationale Well balanced and effectively managed portfolio, without much concentration risk While Cholamandalam is largely know as a Vehicle Financing NBFC, over the last few years it has successfully diversified its portfolio and ramped up its business in the Home Equity segment. Vehicle Finance segment was ~73% of its AUM in FY2012, while Home Equity was 23%. Without defocusing on its core business, the company started ramping up Home Equity segment, which started contributing ~30% of the AUM by the end of FY2016. Within the Home Equity, the loans are given largely to self employed professionals as Loan against Property (LAP). Further, the Vehicle Finance book itself is well diversified. LCV which is largely used for intra city transportation forms the largest component, accounting for ~23% of the AUM. Passenger Vehicles & Multi Utility Vehicles account for 17%, while ~17% is contributed by the HCV segment. As shown in the chart below, the portfolio within the Vehicle Finance segment is well diversified and the company is not over dependent on one particular segment for its growth. Exhibit 1: AUM Break Up 1.4% 0.9% Exhibit 2: Break Up of Vehicle Finance Segment 1% 14% 23% 30.2% 14% 67.4% 6% 9% 16% 17% Vehicle Finance Home Equity MSME Home Loans LCV CAR & MUV HCV Tractor 3W & SCV Refinance Older Vehicle CE % Growth to resume in FY2018, albeit at a slower pace: Cholamandalm s consolidated AUM has grown by an impressive 26.7% over FY , backed by 27.3% CAGR in Vehicle Finance and an outstanding 32.9% CAGR in Home Equity segment over the period. Exhibit 3: AUM Growth 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, ,462 18,998 23,253 25, ,815 34, ,282 46,426 AUM (` Cr) % growth (yoy) January 19,

3 Vehicle Finance will continue to grow in mid-teens; CIFC reported an outstanding 28% CAGR in its Vehicle finance AUM over FY to `20,102cr. Commercial Vehicle financing is the key business for Cholamandalam and new CV accounted for ~40% of the company s AUM at the end of FY2016. Further, the company is also involved in the financing of used vehicle and refinancing of vehicles. While the CV industry has virtually not seen any growth from over the last five years, Chola s growth in AUM in that segment is commendable. It can be inferred from the above that CIFC has gained market share during the period. Exhibit 4: AUM growth - Vehicle Finance Segment 35, , ,000 20,000 15, ,000 5,000-9,848 14,369 17, , , , , Vechile Finance AUM (` cr) % growth 31, The near term picture for the vehicle financing industry doesn t look to be improving, as the utilization levels of fleet operators have come down, and freight availability has reduced. The surface transport industry is highly dependent on cash transactions and, it is more likely with small commercial vehicle owners. Within (Considering) the transport operators, those who are highly engaged with construction activities and involved in the transportation of building materials are witnessing the highest negative impact. People involved in the transportation of white goods and auto & auto ancillary have also seen a fall in demand post demonetization. However, the small fleet operators who are involved in the essential goods and FMCG products have suffered lower damage. However, it is true that the entire process of withdrawing `500 and `1,000 as legal tender has impacted the utilization levels of the transport industry, and hence, in the near term, purchase of new vehicles seems getting deferred. However, Cholamandalam has a much wider portfolio offering within the vehicle financing division, and hence, we believe the growth of the company to be less affected vis-à-vis other players who are largely dependent on CV for their business. January 19,

4 Moderate growth in Home Equity segment expected: Cholamandalam started pursuing the Home Equity segment aggressively from FY2010 and the segment has reported 33% CAGR in AUM over FY In this business, the company largely targets the non salaried professionals for Loan against Property. Large part of the loans from LAP is used for business purpose by the professionals. With general business environment taking a back seat, the incremental demand for loans under LAP will also subsequently slow down in the near term. However, once the demand environment improves, Chola will be able to push through aggressively. Large section of professionals in India has been dealing in cash, and the recent shortage of cash would also in turn have impacted their cash flows. This remains an area of concern as NPAs can be higher than historical in these segments. However, the good part is that the LTV in this segment is ~50% and the valuation is done based on the distress value of the asset while financing, and hence, even if there is a correction in the property prices the risk of property value falling below the LTV is very low. Exhibit 5: AUM growth - Home Equity Segment 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 3, ,337 5,860 7,280 9,014 10,501 12,105 13,985 - Home Equity AUM (` cr) % growth January 19,

5 Asset quality concern relatively lower vis-a-vis other CV financers: Chola has been able to largely maintain a strong asset quality book. The reported rise in GNPAs during FY2016 was due to migration to 4 months (120 DPD) NPA recognition norm v/s 5 months (150 days) earlier, and purely on a like to like basis the GNPA was under control. At the end of FY2016 the GNPA was at 3.35% on 4 months (120 DPD), whereas the management had indicated that on 3 months (90 DPD) basis the GNPAs would have been around 4.3%-4.4%. During Q1FY2017 & Q2FY2017 the company has rather witnessed marginal improvement in asset quality. Exhibit 6: Asset Quality GNPA (%) NNPA (%) While in the near term there could be some blip in the asset quality, we however, remain convinced about the ability of the management to minimize its credit loss. The company s five years average credit cost has been ~111 bps. While in the first two quarters of FY2017, the average credit cost has been ~102 bps, we have factored in relatively higher credit cost for 2HFY2017 resulting in 140 bps credit estimated for FY2017. Exhibit 7: Credit Cost % Exhibit 8: Provisioning Coverage Ratio Trend January 19,

6 Chola s asset quality remains much better than other NBFcs, while there has been an uptick in reported GNPAs, which is largely due to the migration to 4 months (120 DPD) for NPA recognition. As it can be seen in the table below that some of the large NNFCs are still at 5 months (150 DPD), except for Sundaram Finance, which has already complied with the RBI norms and moved to 3 months (90 DPD). Cholamandalam s credit cost in absolute terms looks higher at 140 bps, however, the credit cost for FY2016 is much lower than other NBFC s.we believe that other NBFCs will see incrementally higher provisions when they migrate to 4 months (120 DPD) and subsequently to 3 months (90 DPD). If one has to compare purely on asset quality front, Sundaram Finance stands better than CIFC. However, the growth rate of Sundaram Finance has also been lower than CIFC. Exhibit 9: Comparative Asset Quality FY16 GNPAs % NNPAs % PCR % Credit Cost % DPD Cholamandalam Sundaram Finance STFC STUF M&M Fin Exhibit 10: GNPA Trend of NBFCs GNPAs % Trend FY11 FY12 FY13 FY14 FY15 FY16 Cholamandalam Sundaram Finance STFC SCUF M&M Fin Exhibit 11: NNPA Trend of NBFCs NNPAs % Trend FY11 FY12 FY13 FY14 FY15 FY16 Cholamandalam Sundaram Finance STFC SCUF M&M Fin Lower dependence on Bank funding for growth: Cholamandalam has a very wide source of funding. The company has reduced the source of bank loans from 52.4% in FY2015 to 49.3% in FY2016, which was further reduced to 39.4%. Over the last two quarters the company has aggressively borrowed via Debentures and Commercial papers. The share of Debentures in the total funding has gone up from 20.4% in FY2015 to 21.5% in FY2016 and to 31.9% in Q2FY2017. Efficient mix of funding has enabled the company to lower the cost of funds, which has come down to 9.35% by Q2FY2017 from 9.75% in FY2016. January 19,

7 Exhibit 12: Comparative Borrowing FY16 Bank Loans Debentures CPs/ Securatisation Others Total Cholamandalam Sundaram Finance SCUF M&M Fin Exhibit 13: Borrowing Mix Trend Of Cholamandalam Borrowing Mix FY10 FY11 FY12 FY13 FY14 FY15 FY16 1QFY17 2QFY17 Bank loans Debentures CPs Sub debt CC/WCDL Cost structure reduced to a large extent: The management of Cholamanadalm has done a commendable job as a far as the cost reduction is concerned. On one hand, scaling up operations in the high yielding assets, and on the other hand, reducing operating cost in the form of Branch rationalization has paid off well for the company, which is visible from the sharp reduction in Cost/ Income ratio to 39.4% by the end of FY2016 from 56.1% in FY2012. On both the fronts, i.e Cost/ Income and Cost/Asset, the company remains very competitive against its peers. While the near term slow down in business can result in marginal rise in the same, we expect it to trend down in the coming years, since there is enough scope for the cost structure to go down. Exhibit 14: Cost/ Income Ratio has been trending down Exhibit 15: Cost/Asset also likely to see moderation January 19,

8 Exhibit 16: Comparable Cost/Income to peer banks Cost to Income % FY11 FY12 FY13 FY14 FY15 FY16 Cholamandalam Sundaram Finance STFC SCUF M&M Fin NIM to remain largely stable going ahead Chola s NIM improved in FY2016 backed by lower cost of funds. As discussed earlier, the lower coupon rates of money market instruments allowed the company to borrow more from the market and reduce its dependence on the bank borrowings, thus helping in NIM improvement. Going ahead, we expect the company to pass on some part of the lower cost of funds to the borrowers, but NIM is likely to be maintained at a similar level. Exhibit 17: NIM Trend Yield on loans total Cost of borrowings NIMs (on-aum) January 19,

9 Efficient management of source of funds and cost rationalization has ensured strong & sustainable RoE: CIFC has been able to deploy its raised capital fast and grow the business, which has ensured strong top-line growth. On the other hand it has been able to cut down expenses by rationalizing branches which didn t make economic sense. In FY2015 it took a bold step of closing down 40 gold loan branches. These measures have enabled in strong bottom-line growth despite tough economic scenario over the last few years. Judicious mix of funds and cost rationalization has enabled in five year average RoE of 17.4%. Over the next few years, we believe that, Chola will be able to deliver RoE in-line with its long term average. Exhibit 18: RoA Trend Exhibit 19: RoE Trend Exhibit 20: Comparative RoE of NBFCs Bank FY11 FY12 FY13 FY14 FY15 FY16 Cholamandalam Sundaram Finance STFC SCUF M&M Fin January 19,

10 Exhibit 21: Comparative DuPont Year End FY16 Chola Sundaram Fin STFC STUF M&M Fin Interest earned Interest expended Net Interest Income Non Interest income Total Income Operating cost PPP Provisioning for NPAs PBT Tax ROA ( on AUM) Leverage (AAUM/ AE) RoAE January 19,

11 Strong internal capital generations have ensured capital availability for growth Chola has always remained well capitalized, while it has been able to raise capital at regular intervals, internal capital generation has also been very strong over years. At the end of 2QFY2017 the CAR at 18.7% is strong enough for meeting business growth in the near term. Exhibit 22: History of Capital raised No Of Date Mode Shares (Cr) Issue Price* (`) Amount (` cr) % Dilution 9/2/2015 Preferential Allotment % 2/13/2013 QIP % 3/16/2012 Preferential Allotment % Exhibit 23: Comparative CAR FY16 Cholamandalam Sundaram Fin STFC SCUF M&M Fin CAR % Tier I Tier II January 19,

12 Outlook and valuation Cholmandalm is best placed to play the revival in CV cycle in India. With the pain of demonetization getting over, we expect gradual uptick in freight availability and consequent CV sales. Further, the lower interest rate regime could fuel a growth in passenger vehicle and tractor business. Currently the stock trades at 3.2x its FY2019E ABV. We recommend BUY on the stock with a target price of `1,230. Exhibit 24: One year forward P/BV 1,400 1,200 1, Apr-06 Dec-06 Aug-07 Apr-08 Dec-08 Aug-09 Apr-10 Dec-10 Aug-11 Apr-12 Dec-12 Aug-13 Apr-14 Dec-14 Aug-15 Apr-16 Price 2.0 X 2.5 X 3.0 X 3.5 X 4.0 X Dec-16 January 19,

13 Key risks & concerns A sharp slowdown in CV sales: A Sharp slowdown in CV sales due to prolonged impact of demonetization and consequent impact on the freight availability. However, we believe that the Government intentions are very clear, and spending on Infrastructure projects will gain momentum, which should aid the incremental demand for CV/CE and Freight. Stiff competition from banks: Post demonetization, banks are flushed with huge deposit base and are unable to deploy the incremental deposit. Accordingly, banks have reduced MCLR based lending rates. While as of now very few banks are aggressive on CV financing, the lack of loan demand from corporate side could entice banks to start funding CV. However, we feel that there is low possibility of that happening in the near term. Company Background Cholamandalam Investment & Finance Company Ltd is part of the Murugappa Group. With an AUM base of ~` 32,000 cr the company is a leading player in the Vehicle Finance business in India. Over the years the company has also diversified in the Loan against Property business. Initially it was a predominantly south based company; but gradually it has become a pan India player with presence across 25 states via its 637 branches.the company has strong presence in the rural markets and 90% of the locations are in the Tier-II, Tier-III & Tier IV states. Key Management Personnel Mr M.B.N. Rao Chairman & Independent Director: Mr Rao, the former Chairman & MD of Canara Bank and Indian Bank, has an experience of more than 42 years in the Banking and Finance industry. Mr Vellayan Subbiah Managing Director: He is a Bachelor of Technology in Civil Engineering from IIT Madras and a Masters in Business Administration from the University of Michigan, USA. He has 21 years of experience in the field of technology, projects and financial services. January 19,

14 Comparative table Exhibit 25: Comparative Analysis: Parameters (` Cr) Chola Sundaram Finance STFC SCUF M&M Fin 5 Yr AUM CAGR % AUM March ,133 12,354 36,187 7,998 12,669 AUM March ,815 17,895 72,760 19,576 36,658 5 Yr NII CAGR % NII March , ,314 NII March ,737 1,034 4,455 2,451 3,213 5 Yr PAT CAGR % (1) 17 9 PAT March , PAT March , Exhibit 26: Comparative Valuations P/BV* ROE% ROA% NNPAs% Cholamandalam Sundaram Finance STFC SCUF M&M Fin ; Net Worth Adj for NPAs, and all data has been taken for FY16 end for comparative purpose. January 19,

15 Income statement (standalone) Y/E March (` cr) FY14 FY15 FY16 FY17E FY18E FY19E NII 1,129 1,376 1,737 2,012 2,317 2,711 - YoY Growth (%) Other Income YoY Growth (%) 12.5 (2.4) Operating Income 1,492 1,731 2,143 2,457 2,826 3,307 - YoY Growth (%) Operating Expenses ,094 1,264 - YoY Growth (%) Pre - Provision Profit ,298 1,501 1,732 2,043 - YoY Growth (%) Prov. & Cont YoY Growth (%) (5.0) 13.9 Profit Before Tax ,025 1,279 1,527 - YoY Growth (%) Prov. for Taxation as a % of PBT PAT ,008 - YoY Growth (%) Balance Sheet (standalone) Y/E March (` cr) FY14 FY15 FY16 FY17E FY18E FY19E Share Capital Reserve & Surplus 2,151 2,529 3,501 4,063 4,768 5,613 Net Worth 2,295 2,673 3,657 4,219 4,924 5,769 Share application Borrowings 18,093 19,475 22,576 25,540 29,461 34,820 - Growth (%) Other Liab. & Prov. 1,159 1,225 1,655 1,318 1,303 1,358 Total Liabilities 21,547 23,873 27,888 31,076 35,689 41,947 Cash and Cash equivalents Investments Advances 19,428 22,184 25,910 28,945 33,389 39,462 - Growth (%) Fixed Assets DTA Other Assets 1,033 1,030 1,028 1,107 1,193 1,286 Total Assets 21,547 23,873 27,888 31,076 35,689 41,947 January 19,

16 Ratio analysis (standalone) FY14 FY15 FY16 FY17E FY18E FY19E Profitability ratios (%) NIMs RoA RoE Asset Quality (%) Gross NPAs ,044 1,260 1,493 1,532 Gross NPAs % Net NPAs Net NPAs % Credit Cost Per Share Data (`) EPS BVPS Adj BV DPS Valuation Ratios PER (x) P/BVPS (x) P/ABVPS (x) Dividend Yield (%) DuPont Analysis Interest Income Interest Expenses NII Other Inc Total Income Opex PPP Provision PBT Taxes RoA Leverage RoE January 19,

17 Research Team Tel: Website: DISCLAIMER Angel Broking Private Limited (hereinafter referred to as Angel ) is a registered Member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and Metropolitan Stock Exchange Limited. It is also registered as a Depository Participant with CDSL and Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel Broking Private Limited is a registered entity with SEBI for Research Analyst in terms of SEBI (Research Analyst) Regulations, 2014 vide registration number INH Angel or its associates has not been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its associates/analyst has not received any compensation / managed or co-managed public offering of securities of the company covered by Analyst during the past twelve months. This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. Investors are advised to refer the Fundamental and Technical Research Reports available on our website to evaluate the contrary view, if any. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Neither Angel Broking Pvt. Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Disclosure of Interest Statement Cholamandalam Inv. & Fin. Co. 1. Financial interest of research analyst or Angel or his Associate or his relative No 2. Ownership of 1% or more of the stock by research analyst or Angel or associates or relatives No 3. Served as an officer, director or employee of the company covered under Research No 4. Broking relationship with company covered under Research No Ratings (Based on expected returns Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) over 12 months investment period): Reduce (-5% to -15%) Sell (< -15) January 19,