SECTOR: FINANCIAL
Cholamandalam Investment & Finance
STOCK INFO.
BLOOMBERG
BSE Sensex : 26597
S&P CNX : 7958
CIFC:IN
REUTERS CODE
30 September 2014
Initiating Coverage
(INR CR)
BUY
INR481
CHLA.NS
Y/E MARCH
FY14
FY15
FY16
We recommend to BUY Chola for a target of INR 600 - valuing
the company at a P/B of 2.6x on FY16E book value per share.
INVESTMENT ARGUMENT:
NII (INRCr.)
OP (INRCr.)
NP (INRCr.)
EPS (INR)
EPS Growth (%)
BV/Share (INR)
P/E (x)
P/BV (x)
ABV/Share (INR)
P/ABV (x)
RoE (%)
RoA (%)
Div yld (%)
KEY FINANCIALS
Shares Outstanding (Cr)
Market Cap. (INR Cr)
Market Cap. (US$ M)
1,180
833
364
25.4
19
160
19
3.0
148
3.2
17.1
1.8
0.7
1,373
1,014
443
28.5
12
204
17
2.4
192
2.5
16.2
1.9
0.7
1,602
1,271
581
37.3
31
237
13
2.0
227
2.1
16.9
2.1
0.7
Turnaround in CV cycle to restore business momentum:
Auto
makes up 74% of Chola's loan book, of which CVs constitute 80%.
We believe the CV cycle is currently witnessing a turnaround and is
expected to resume its growth trajectory in H2FY15 thereby driving
19% loan book CAGR over FY14-17E in the vehicle finance segment.
Focus on rural, small fleet operators and self-employed
segments restricts competition:
70% of Chola's 577 branches are
located in rural areas, 20% have a semi-urban focus while 10% are
urban centric. Under vehicle financing, Chola's clientele primarily
consists of small fleet operators (more than 2/3rd of portfolio). Under
home equity (loan against property), the entire clientele comprises of
self-employed individuals. Thus the target segments for both the
businesses of Chola have characteristics involving low ticket size, cash
transactions, limited credit history and volatile cash flows which makes
it difficult for banks to address.
Operating leverage to drive ROA and profits:
Chola carried out
large scale expansion in its branch network over the last four years
(577 as on date), up by 3.6x since FY10. Chola added 53% new
branches over FY12-14 as compared to a more cautious expansionary
approach adopted by peers - Shriram Transport (30%) and Sundaram
Finance (6%). This is reflected in Chola's higher cost/income ratio at
44% vs peer group average of 32%. However, with the impending
recovery in the CV cycle, Chola enjoys higher operating leverage
which would enable it to grow its profits at 30% CAGR over FY14-
17E as opposed to 20% for its peer group. Further, Chola's cost/income
ratio has consistently declined from 53% in FY11 to 44% in FY14 and
is expected to decline to 32% by FY17E which will drive ROA from
1.8% in FY14 to 2.5% by FY17E. The management has guided for
ROA of 3% over the next 4-5 years which we believe can be achieved.
Valuations and View:
Improvement in cost/income ratios driven by
productivity improvements and higher CV sales, diversification of loan
book towards home equity reducing cyclicality in loan book growth
and normalization of credit costs from the current cyclical peaks should
transform the business to ~2.5% ROA from current ROAs of ~1.8%.
Improvement in ROAs should translate into significant rerating
opportunity for the business in a 2-3 year time horizon. We recommend
"BUY" for a target price of INR 600 - potential upside of 25%.
15.55
7,482
1,247
35%
37%
17
3 yrs NII Growth to FY15E (%)
Past 3 yrs NP Growth (%)
Dividend Payout (%)
STOCK DATA
52-W High/Low Range (INR)
Major Shareholders (as of Jun'14)
Promoter
Non Promoter Corp Holding
Public & Others
Average Daily Turnover(6 months)
Volume
Value (INR mn)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
518/217
57.8
33.7
8.5
8,644
3.5
19/48/86
19/67/121
Maximum Buy Price: INR500
Jehan Bhadha
(jehan.bhadha@motilaloswal.com); Tel:+912233124915
 Motilal Oswal Financial Services
Cholamandalam Investment & Finance
CONCERNS
Deterioration in asset quality:
Currently, the CV industry is under pressure due to the economic
slowdown. On the cost front, the diesel price hikes, increase in toll rates and higher driver costs are
adding pressure on the ability of transport operators to repay loans. We have already seen GNPA's
rise to 2.4% in Q1FY15 from 1.1% in Q1FY14. Continued pressure on the borrower's ability to
repay will lead to further asset quality deterioration. We however expect Chola's asset quality to
bottom out in Q2FY15E and start improving from H2FY15E.
Portfolio concentration risk:
Vehicle loans constitute 74% of the overall loan book. Within vehicle
financing, CV financing constitutes 80% which is characterized by severe cyclicality and higher
delinquency rates. However Chola has made efforts to de-risk its business model by focusing on the
tractor and car portfolios as well as by diversifying in the home equity business which today constitutes
25% of its loan book. Besides, the company plans to extend its home equity business by entering the
home loan market and venture into business loans as well as loans for farm inputs.
BACKGROUND
Chola was incorporated in 1978 as the financial services arm of the Murugappa Group which holds
a 57.8% stake through Tube Investments and other entities of the Murugappa group. Chola
commenced business as an equipment financing company and has today emerged as a financial
services provider offering vehicle finance, home equity loans, home loans, investment advisory services,
stock broking and a variety of other financial services to customers. Chola has assets under
management of Rs 23,911 cr. The subsidiaries include Cholamandalam Securities Limited (CSEC)
and Cholamandalam Distribution Services Limited (CDSL). Other major companies of the Muruguppa
group include Carborundum Universal, Cholamandalam MS General Insurance, Coromandel
International, Coromandel Engineering, E.I.D. Parry (India), Parry Agro Industries, Sabero Organics,
Shanthi Gears, Tube Investments, and Wendt (India).
PEER VALUATION
FY14-17E CAGR
ADVANCES
PAT
Q1FY15
GNPA
ROA
ROE
FY16E
P/ABV
P/E
M & M Financial
Shriram Transport
Sundaram Finance
Average
Chola
15%
21%
17%
17%
19%
18%
23%
18%
20%
30%
6.20%
3.70%
2.30%
4.10%
2.40%
2.90%
2.90%
3.30%
3.00%
2.20%
19.10%
17.20%
22.20%
19.50%
17.00%
2.5
2.1
3.4
2.6
2.1
12.9
12
15.8
13.5
12.9
Source : Bloomberg estimates used for peers
MMFSL
Shr Trans
Note: Size of the bubble indicates GNPA (%)
30 September 2014
2
 Motilal Oswal Financial Services
Cholamandalam Investment & Finance
IVRCL: Financials and Valuation
Financials and valuation
Income Statement
Y/E March
Interest Income
Interest Expenses
FY13
2,263
1,411
852
53%
293
1,145
47%
571
574
69%
124
450
144
32%
306
78%
FY14
2,951
1,771
1,180
39%
311
1,492
30%
659
833
45%
283
550
186
34%
364
19%
FY15E
3,341
1,968
1,373
16%
340
1,713
15%
699
1,014
22%
343
671
228
34%
443
22%
FY16E
3,810
2,208
1,602
17%
406
2,008
17%
737
1,271
25%
391
880
299
34%
581
31%
(INR Cr)
FY17E
4,494
2,557
1,937
21%
505
2,442
22%
777
1,665
31%
461
1,204
409
34%
795
37%
Expect 18% NII CAGR
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
FY14-17 PAT CAGR of 30%
Profit After Tax
Change (%)
Balance Sheet
Y/E MARCH
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
Other Borrowings
Total Deposits and Borrowings
Other Liabilities
Total Liabilities
Balance with RBI
Investments
Loans
Net Fixed Assets
FY13
143
1,822
1,965
14,419
29%
870
15,289
931
18,185
389
150
16,626
71
949
18,185
FY14
143
2,151
2,295
17,528
22%
565
18,093
1,159
21,547
801
16
19,428
73
1,229
21,547
FY15E
156
3,018
3,174
20,356
16%
635
20,991
859
25,024
1,001
16
22,134
79
1,794
25,024
FY16E
156
3,535
3,691
24,108
18%
752
24,860
890
29,441
901
16
26,678
84
1,763
29,441
(INR Cr)
FY17E
156
4,266
4,424
28,993
20%
905
29,898
899
35,221
801
16
32,700
88
1,616
35,221
Expect 19% loan CAGR over
FY14-17
Net Current Assets
Total Assets
Asset Quality
GNPA
200
43
1.0%
0.2%
78%
436
174
1.9%
0.7%
60%
586
193
2.2%
0.7%
67%
536
161
1.7%
0.5%
70%
NNPA
GNPA Ratio
NNPA Ratio
PCR
E: MOSL Estimates
(%)
386
96
1.0%
0.2%
75%
Asset quality to peak in
Q2FY15 and decline
thereafter
30 September 2014
3
 Motilal Oswal Financial Services
Cholamandalam Investment & Finance
IVRCL: Financials and Valuation
Financials and valuation
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Cost of Deposits and Borrowings
Net Interest Margin
Profitability Ratios (%)
RoE
RoTA
Int. Expense/Int. Income
Non Int. Inc./Net Income
FY13
15.2
15.4
10.6
7.6%
FY14
15.7
16.1
10.6
7.7%
FY15E
15.4
15.8
10.2
7.7%
FY16E
15.0
15.3
9.9
7.6%
FY17E
14.7
14.8
9.6
7.6%
Higher margins led by high-
yield loans
18.1
1.9
62
26
17.1
1.8
60
21
16.2
1.9
59
20
17.0
2.2
58
20
19.6
2.5
57
21
High operating leverage to
result in a further decline in
Cost/Income ratio led by a
recovery in the CV business
Efficiency Ratios (%)
Cost to Income
Emp. Cost / Operating Expenses
Provisions to NII
Asset-Liability Profile (%)
LoansDeposit Ratio
CAR
Valuation
Book Value Per Share (Rs)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
Dividend Per Share (Rs)
Dividend Yield (%)
E: MOSL Estimates
50
27
15
44
28
24
41
29
25
37
30
24
32
31
24
115
19.0
111
17.2
109
18.2
111
17.5
113
17.0
137
28%
3.5
134
3.6
21
65%
22.5
4
0.7%
160
17%
3.0
148
3.2
25
19%
19.0
4
0.7%
204
27%
2.4
192
2.5
28
12%
16.9
4
0.7%
237
16%
2.0
227
2.1
37
31%
12.9
4
0.7%
284
20%
1.7
278
1.7
51
37%
9.4
4
0.7%
30 September 2014
4
 Motilal Oswal Financial Services
Cholamandalam Investment & Finance
For more copies or other information, contact
Retail:
Vijay Kumar Goel
Phone: (91-22) 30896000 Fax: (91-22) 30278036. E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd., Motilal Oswal Tower, Level 6, Sayani Road, Prabhadevi, Mumbai 400 025
This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you.
This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities
Limited (hereinafter referred as MOSL) is not soliciting any action based upon it. This report is not for public distribution and has been furnished
to you solely for your information and should not be reproduced or redistributed to any other person in any form.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this
information specifically agrees to exempt MOSL or any of its affiliates or employees from, any and all responsibility/liability arising from such
misuse and agrees not to hold the MOSL or any of its affiliates or employees responsible for any such misuse and further agree to hold the MOSL
or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing
this information due to any errors and delays.
The information contained herein is from publicly available data or other sources believed to be reliable. While we would endeavour to update the
information herein on reasonable basis, MOSL and/or its affiliates are under no obligation to update the information. Also there may be regulatory,
compliance, or other reasons that may prevent MOSL and/or its affiliates from doing so. MOSL or any of its affiliates or employees shall not be
in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in
this report. MOSL or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any
matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-
infringement. The recipients of this report should rely on their own investigations.
MOSL and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To
enhance transparency, MOSL has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as
endorsement of the views expressed in the report.
Disclosure of Interest Statement
Cholamandalam
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
Investment & Finance
No
No
No
No
This information is subject to change without any prior notice. MOSL reserves the right to make modifications and alternations to this statement
as may be required from time to time.
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the Analyst(s) about the subject securities or issuers and
no part of the compensation of the research Analyst(s) was, is, or will be directly or indirectly related to the specific recommendation views
expressed by research analyst(s) in this report.
The research analysts, strategists, or research associates principally responsible for preparation of MOSL research have received compensation
based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.