Chola Investment and Finance share price: Sharekhan maintains Buy rating with a revised target price of Rs 520

Cholamandalam Investment and Finance Company is well placed to benefit as macro factors turn favourable (lower borrowing costs, healthy offtake in auto sales) along with a combination of strong collections and high ECL provisions for CIFC that offer comfort on asset quality going forward. Sharekhan believes economic recovery and healthy traction seen in automobile demand along with a resilient rural economy brighten the growth outlook. Sharekhan have fine-tuned our estimates accordingly. Sharekhan maintains Buy rating with a revised price target of Rs 520 on the share price of Chola Investment.

Sharekhan believes growth outlook is improving for vehicles finance NBFCs along with lower credit cost outlook which is the reason for improved earnings estimates. Sharekhan believes tailwinds benefits (a combination of improving disbursements and falling funding costs) for Chola Investment will help it deliver strong Operating performance (NII, PAT etc) over the next two years in terms of as well as margins cushion. Over the past few months, well-rated and large NBFCs have seen a sharp fall in funding costs, which has resulted in benefits of lower funding costs for them.

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Additionally, increased funding through NCDs, shifting benchmark to repo from MCLR has helped many companies in similar space to reduce their funding cost. Hence, Sharekhan expects overall funding costs to continue to fall, as weighted average funding cost catches up with about 100-150 lower incremental cost of funds. Lower funding cost (due to improved risk appetite of lenders) will be supportive to wean NBFCs from the excess liquidity on the balance sheet and will provide further filip to margins.

Chola Investment has been maintaining a highly liquid balance sheet (9.8% of total assets as of Q2FY2020, marginally lower than all-time high seen in FY2020), which is expected to come down with improved asset quality and borrowing scenario. CIFC has a well-diversified vehicle financing business (both in terms of geographical and product mix), which has consistently exhibited robust growth, while maintaining asset quality over cycles. Factors such as improving asset-quality outlook (improving collections efficiency and high provision cover) are encouraging; management has also indicated that it expects less than 5% of portfolio likely to be restructured (consists mainly of borrowers such as bus operators), which is a positive.

A diversified product basket, parentage of the Murugappa group, strong historical underwriting, and ample liquidity make Chola Finance among the best players in the vehicle financing space.

Key Risks:

Delayed recovery in economic activity will affect growth and profitability; further, it has exposure to the SME segment, which may be vulnerable if economic recovery is delayed.