Disbursement growth will be higher than AUM growth– CHOLAFIN

Update on the Indian Equity Market:

On Monday, Nifty closed 0.1% higher at 14,956. Within NIFTY50, UPL (+7.1%), GAIL (+4.3%), and LT (+3.4%) were the top gainers, while INDUSINDBK (-2.2%), SHREECEM (-2.2%), and BAJFINANCE (-2.1%) were the top losing stocks. Among the sectoral indices, PSU BANK (+1.6%), MEDIA (+1.0%), and METAL (+0.8%) were the top gainers while REALTY (-1.1%), FMCG (-0.5%), and FINANCIAL SERVICES (-0.4%) were the top losers.

Disbursement growth will be higher than AUM growth– CHOLAFIN

Excerpts of an interview with Mr. D Arul Selvan, Executive VP and CFO, Cholamandalam Investment and Finance (CHOLAFIN), aired on CNBC-TV18 on 4^th March 2021:

• Commercial Vehicles (CV) replacement has been delayed by about 2 years now due to a series of factors such as axle load norms, BS6 implementation, and covid-19 impact. Mr. Selvan expects the replacement demand to kick in as CVs have to be replaced sooner or later. February 2021 itself saw good growth across CV segments.
• Disbursements will have good growth in FY22E, but the AUM growth will not be the same. During the moratorium period, disbursements dropped but AUM was not impacted in the absence of repayments. Now as repayments also happen, disbursement growth will be higher while the AUM growth will be lower.
• CHOLAFIN is adequately provided and won’t see higher credit costs. The collections are also improving. February as a 28-day month generally has lower absolute collections. However, collections in February 2021 have been marginally higher than January 2021.
• Selvan is seeing that the earning potential of customers is improving and they are now able to service loans comfortably.
• CHOLAFIN’s 4QFY21E RoE should be significantly better than FY20 reported numbers and directionally, the RoE would now improve.
• Mr Selvan expects that the NIMs will be stable. NIMs could have marginally improved but CHOLAFIN is now scaling up on M&HCV segment which has lower NIMs. M&HCV lending business has a lower yield but it is compensated by much lower operating expenses and lower loan losses.

Asset Multiplier Comments:

• CV cycle recovery has been a matter of debate between industry players for some time now. Some companies seem to be banking on the hope that CV recovery is here, while some players think we are still some time away from the upcycle.
• Lenders across board have been witnessing improvement in collection efficiency. This is attributable to opening up of the economy post lockdown.

Consensus Estimate (Source: investing. com and market screener websites)

• The closing price of CHOLAFIN was ₹ 537 as of 8-March-2021. It traded at 4.5x/ 3.8x/ 3.1x the consensus BVPS estimate of ₹ 119/142/171 for FY21E/ FY22E/ FY23E respectively.
• The consensus target price of ₹ 444/- implies a PB multiple of 2.6 on FY23E BVPS of ₹171/-.

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