Tuesday, February 7, 2012

>Cholamandalam Investment and Finance: 3QFY12: Robust loan growth, stable asset quality; Buy

Cholamandalam Investment and Finance’s net profit grew 515% yoy, driven by robust loan growth, up 46% yoy, and expansion in NIM in 3QFY12 . We expect strong loan growth, better NIM and lower provisioning to drive RoA to 1.6% by FY14 (from 0.7% in FY11). We maintain a Buy.

 Robust loan growth, better NIM. Disbursements grew 55% yoy (10.7% qoq) to `22.8bn, driven by 65.4% growth in vehicle-loan disbursement. CIF commenced disbursements in the gold-loan segment in Dec ’11. We expect a 34% CAGR in the loan book over FY11-14, led by strong branch expansion and the scaling up of new products. NIM improved 10bps qoq to 6.6%, as the share of higher-yield used-CVs in the vehicle-finance portfolio rose to 29% at end-3QFY12 (from 27% a quarter ago). With the rising proportion of higher-yielding products, we expect NIM to be 6.5% over FY12-14.

 Stable asset quality. With the gross NPA down 3.5% qoq, asset quality improved. NPA coverage, at 81%, is adequate for incremental delinquencies. With limited exposure to personal loans and stable levels of gross NPAs in the vehicle and mortgage businesses (respectively, 0.7% and 1%), credit cost over FY12-14e is expected at 0.9% of loans.

 Fund-raising to aid robust loan growth. CIF’s capital adequacy, at 17.8%, with Tier 1 of 9.7%, is lower than its peers’. CIF’s board has approved raising `2.1bn in equity, diluting it by 11.1%, at `160 per share on a preferential basis to private equity investors. This is likely to aid the NBFC sustain its robust loan growth over FY12-14e.

 Valuation. At our price target of `181, the stock would trade at FY12e and FY13e PBV of 1.8x and 1.5x, respectively. Risk: Slower-than expected rural economic growth could impact loan growth.