Cholamandalam Initiation Report
Cholamandalam Initiation Report
Cholamandalam Initiation Report
INDIA
March 1, 2016
BSE Sensex: 23779
ADD
Jun
15
57.7
Sep
15
53.2
Dec
15
53.2
35.4
8.2
17.0
10.2
6.9
40.4
7.5
10.0
22.9
6.4
39.8
8.4
31.3
15.0
7.1
FY16E
9.6
2.2
(1.3)
FY17E
8.9
5.1
5.3
Price chart
Mar-16
Mar-15
Sep-15
Mar-14
Sep-14
Mar-13
800
700
600
500
400
300
200
100
Sep-13
(Rs)
Rs649
On a steady path
NBFC
Rs101bn/US$1.5bn
Year to March
Reuters/Bloomberg
CHLA.BO / CIFC IN
156.1
FY16E
FY17E
FY18E
20,768
24,096
27,463
4,352
5,211
7,020
8,558
EPS (Rs)
27.9
33.4
44.9
54.8
46.8
% Chg YoY
19.2
10.2
34.7
21.9
FII (%)
31.3
P/E (x)
23.3
19.5
14.4
11.8
santanu.chakrabarti@icicisecurities.com
906
P/BV (x)
3.2
2.8
2.4
2.1
1.4
2.3
2.9
3.5
3.0
Harshit Toshniwal
14.5
0.5
0.7
0.9
1.1
(9.1)
RoA (%)
1.9
2.0
2.4
2.6
(17.9)
RoE (%)
15.9
15.4
18.0
18.7
Research Analysts:
Santanu Chakrabarti
harshit.toshniwal@icicisecurities.com
721/547
FY15
17,034
ICICI Securities
TABLE OF CONTENTS
One of the leaders in vehicle finance ............................................................................ 3
Diversification complements core strengths in vehicle finance....................................... 4
Housing foray improves capital productivity................................................................ 8
It is not all a bed of roses though .................................................................................. 11
Technology a key enabler of operating excellence .................................................... 13
Operational strengths are revealed in deep dive .......................................................... 13
Technology has played a crucial role............................................................................ 17
In a nutshell, Chola has married old and new strengths ............................................... 18
Safer, but lower delta to cyclical revival than peers .................................................. 22
Earnings predictability higher than most peers ............................................................. 22
Earnings predictability cuts both ways .......................................................................... 26
12M target price set at Rs700 ....................................................................................... 29
Annexure 1: Vehicle finance sub-segments - analysis .............................................. 30
Light Commercial Vehicles remain a calling card ......................................................... 30
Passenger cars have become an important segment for Chola ................................... 32
HCV tailwind is despite multiple roadblocks ................................................................. 33
Used vehicles presence in both refinance as well as resale ..................................... 34
Tractor business - steady growth given segment realities ............................................ 35
3W and SCV clearly a pain point ............................................................................... 36
Annexure 2: Financials.................................................................................................. 38
Annexure 3: Company Profile....................................................................................... 41
Annexure 4: Index of Tables and Charts ..................................................................... 42
ICICI Securities
Other Loans
2%
HCV
14%
LCV
24%
Tractor
10%
Vehicle Loan
68%
Home Equity Loan
30%
Older
Vehicles
13%
Refinance
15%
3W & SCV
7%
% of VF
Portfolio
AUM
(Rs
bn)
Market
share
estimate
(%)
45.3
2 year AUM
CAGR
(9 qtrs
figure
annualised)
(4.9)
LCVs
24
Passenger
Cars/
MUVs
16
30.2
MHCVs
14
Used
Vehicles
Refinance
Tractor
Distribution
model
LTV
Interest
rates (%)
17
Avg.
ticket
size
estimate
(Rs mn)
0.46
Dealer linked
8090%
~15%
57.5
0.40
Dealer linked
8090%
~14%
26.4
15.7
1.14
Dealer linked
8090%
~12-13%
13
24.5
6.0
NA
0.16
70%
~19-24%
15
28.3
2.1
NA
NA
70%
~15-19%
10
18.9
12.6
NA
0.37
Broker
sourced
Existing
relationship
Dealer linked
~16-19%
13.2
45.9
NA
NA
Dealer linked
Comm.
1
1.9
*Started in
Equipment
FY16
Source: Company data, I-Sec research
NA
NA
8090%
8090%
8085%
3W & SCV
Key Commentary
~16-17%
~14%
ICICI Securities
FY12
FY13
FY14
134
409
621
183
465
683
227
340
719
189
253
676
16.8
1.8
0.5
17.6
3.0
0.9
17.8
5.2
1.2
17.1
7.6
2.2
1,164
33
2.82
1,331
52
3.90
1,286
67
5.23
1,118
67
5.98
5.2
(%)
5
3.9
4
3
2.8
2
1
0
FY11
FY12
FY13
FY14
ICICI Securities
Chart 3: Market Share Trend in LCV and MHCV segmentsreflects the overall
strategic reaction to cyclical realities
MarketShare(%)
FY11
20.0
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
-
17.6
16.8
17.8
FY12
FY13
FY14
17.1
7.6
5.2
1.8
3.0
LCV
MHCV
The obvious advantage to Cholas well diversified presence in the vehicle finance
segment is that cyclical vulnerability is comparatively lower than peers focusing on
specific niches. As both the rural economy and industrial activity has nosedived in
India in the last two years, this diversification has ensured that the company could be
nimble about the avenues to pursue asset growth in this segment.
Chart 4: Flexibility to switch segment focus, hedges the overall portfolio growth
against economy driven risks to individual segments
LCV
Others
100
90
(% of VF AUM)
80
39
38
37
36
36
35
35
20
21
22
23
22
23
24
12
13
14
15
15
16
16
29
29
28
27
26
26
25
24
42
70
60
50
21
40
30
20
10
0
Although, credit costs in the business have gone up substantially in the last two years
(thanks to both cyclical headwinds as well NPA recognition norm migrations), margins
have improved, thanks to multiple relatively high yield segments and liability tailwinds.
ICICI Securities
2.2
1.9
2.0
(%)
1.5
1.5
1.0
1.9
1.8
2.0
2.1
2.1
1.6
1.4
0.6
0.6
Q1FY13
Q2FY13
Q3FY13
0.8
0.6
0.5
0.5
Q2FY16
Q3FY16
Q4FY15
Q1FY16
Q3FY15
Q3FY15
Q2FY15
6.9
Q2FY15
Q1FY15
7.5
6.7
7.2
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
0.0
8.1
8.1
8.2
7.3
Q3FY13
Q4FY13
7.3
7.1
7.0
7.1
Q4FY14
7.2
Q3FY14
7.1
Q2FY14
7.2
Q2FY13
Q1FY13
9
7
(%)
6
5
4
3
2
1
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q1FY14
Consequently, segmental pre-tax RoA has come down but not by much.
Chart 7: Segmental pre-tax RoA has reduced but not collapsed
Pre Tax RoA of VF Business segment
2.8
3.0
3.1
(%)
2.5
2.2
2.2
2.1
2.0
1.6
1.6
1.8
2.0
2.2
2.2
Q2FY16
2.7
Q1FY16
2.8
Q2FY15
3.0
Q1FY15
3.5
2.4
1.5
1.0
0.5
Q3FY16
Q4FY15
Q3FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
0.0
ICICI Securities
We build in ~13.2% AUM growth for the vehicle finance business over FY16E-18E.
We feel that risks to these growth assumptions are significantly lower than most peers
due to diversification benefits.
Chart 8: Vehicle finance AUM growth over FY16E-FY18E to remain healthy but
not spectacular
VF AUM
300
12
(Rs bn)
200
10
8
150
100
14
250
4
50
2
0
0
FY15
FY16E
FY17E
FY18E
ICICI Securities
(Rs bn)
60
50
40
30
20
10
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
35
30
(Rs bn)
25
20
15
10
5
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
While the asset growth in the business has been impressive, it has also been led by
an expansion in average loan ticket size which currently stands at ~Rs5mn.
The company focuses on the self-employed non-professional segment of the
population in the B & C mid-level socio-economic categories (a traditional
strength). The loan tenor can be up to 10 years and the collateral is generally
limited to self-occupied residential property (a strong disincentive against the
moral hazard of opportunistic/speculative borrowing).
ICICI Securities
With yields in the home equity loans business significantly lower than vehicle finance,
margins are obviously lower. This is however a significantly lower operating cost
segment, thanks to larger ticket size and lower collection intensity requirement. The
biggest benefit of the foray into this business however has been in credit costs, which
despite hardening, is significantly lower than the vehicle finance business.
Chart 11: Higher NIMs supported by higher yields in vehicle finance business
NIMs
9
Vehicle finance
(% of total assets)
Home Equity
7
6
5
4
3
2
1
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Chart 12: but higher operating costs associated with vehicle finance
Operational Costs
Vehicle finance
(% of total assets)
Home Equity
4
3
3
2
2
1
1
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
ICICI Securities
(% of total assets)
2.5
Vehicle finance
Home Equity
2.0
1.5
1.0
0.5
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
0.0
This leads to significantly higher pre-tax RoA for the home equity loans business. With
risk weights for both segments at 100% and no difference in tax rates, home equity
loans have clearly been a RoE accretive diversification.
Chart 14: Home Equity Loans, a higher RoA business for the company
Pre Tax Return on Total Assets
Vehicle finance
4.0
Home Equity
(% of total assets)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
0.0
We build in a CAGR of 16.8% for the segment AUM over FY16E-18E. In the absence
of a major correction in real estate prices, the risks to these growth assumptions
appear low.
10
ICICI Securities
Most lenders remain wary of customers financial position when they avail this
loan. With loan rates at 13-15%, apart from the cases where such borrowings are
deployed by customers into their own business, the general suspicion remains that
the borrower is in some sort of financial emergency.
Lenders do not like the fact that the ultimate end use of the money is not under
their direct control.
While the collateral may be enforceable in the case of individual LAP loans
through SARFAESI (not yet notified by RBI, although granted in the last Union
Budget), our contacts in credit underwriting businesses feel that the pool defaults
are likely to be higher than plain vanilla mortgages.
In order to mitigate the risks, the most prominent players are taking the following
precautions:
LTVs are much lower than the 80% maximum allowed for mortgage loans. For
most players, it tops out at 70% with 50-60% being the usual range.
Lenders try to gauge the cashflow pattern based repayment capacity of the
borrower and not just rely on the adequacy of collateral.
The exposure to this business line is capped to a limited portion of the overall
asset portfolio.
One rule of thumb we rely on, to gauge the risk inherent in a LAP portfolio, is to
focus on ticket size and loan pricing. Obviously, all other things remaining
equal, the smaller the better on both counts from a risk perspective. We also
believe that LTV in the case of LAP loans is a subjective opinion and should not
be accorded the same importance to analysis of portfolio risks, as one would
give it for judging an auto or mortgage portfolio. The simple reason is that for
the latter cases, valuation of asset is based on a transacted price of the asset
and therefore more objective in nature.
On both these counts, Cholamandalam Finance checks out reasonably well. As we
saw earlier, despite significant ticket size inflation current average ticket size of Rs5mn
is not excessive by sector standards. When we try to plot average interest income
yield from the home equity loans business, loan pricing also seems to suggest a focus
on the low to moderate risk end of the customer risk profile spectrum.
11
ICICI Securities
Chart 15: Home equity interest yields remain moderate a good sign
Home Equity - Interest Yield
14.5
13.3
14
12.9
12.0
12
11.9
10.6
(%)
10
8
6
4
2
0
FY10
FY11
FY12
FY13
FY14
FY15
Having said this, a LAP exposure remains somewhat vulnerable to risks from a sharp
real estate price correction, by its very nature. We indicate in our opening investment
thesis that asset quality of the LAP portfolio will remain a key risk to monitor for
existing and potential investors. Management also indicated in the Q3FY16 earnings
conference call that certain geographical pockets are seeing some stress.
12
ICICI Securities
12
(%)
10
7.0
6.0
6
4.8
4
2.1
2
0
Cholamandalam M&M Financials Shriram City
Investments
Union Finance
Shriram
transport
Sundaram
Finance
13
ICICI Securities
To understand why Chola has been able to pull off this level of relative
outperformance on asset quality, one has to look at their collection specific costs
which are separately provided within other operating expenses in their annual reports.
Chart 17: A higher expenditure on strengthening recovery efforts has helped the
asset quality to remain healthy A STITCH IN TIME, SAVES NINE
1,600
Collection costs
1,400
(Rs mn)
1,200
1,000
800
600
400
200
0
FY12
FY13
FY14
FY15
(Rs mn)
17
21
19
18
15
10
5
0
FY12
FY13
FY14
FY15
Q3FY16
However, the step up in collection costs emphasises the extent to which employees
have been reallocated towards collection management efforts, as the cycle turned
adverse. The company has managed the collection effort by creating separate teams
for overdue loan assets, depending on bucket of default. Employees managing higher
buckets handle lesser number of accounts on a per capita basis given higher intensity
of effort required per account.
14
ICICI Securities
Secondly, notice the trend in operating costs as a percentage of AUM in Chola. While
LAP is certainly a lower cost to assets business than vehicle finance, it cannot explain
all the improvement since FY12, nor can operating leverage.
Chart 19: Operating costs as a % of AUM
Total Opex as a % of Average AUM
4.5
4.0
4.0
3.6
3.5
3.1
3.1
3.2
FY14
FY15
9MFY16
(%)
3.0
2.5
2.0
1.5
1.0
0.5
FY12
FY13
Even if we strip out new disbursement related direct costs and the collection cost
(stepped up for cyclical stress) from operating costs it has remained stable over last 5
years. This bears testimony to productivity gains achieved with the intelligent use of
technology.
Chart 20: Business origination expense as a % of disbursements remain
constant over the period
1.5
1.5
FY15
1.4
FY14
1.4
FY13
1.5
FY12
1.5
FY11
1.6
FY10
1.4
1.2
(%)
1.0
0.8
0.6
0.4
0.2
-
15
ICICI Securities
Chart 21: Operating expense excluding business origination & collection costs
has fallen as a % of AUM
2.0
1.79
1.72
FY15
FY14
2.5
(%)
1.5
1.0
0.5
16
FY13
FY12
0.0
ICICI Securities
Front End
OPERATIONS
Partner
sites
Back End
17
ICICI Securities
18
ICICI Securities
Deepening of distribution reach. In the last six years, the company has grown its
branch network at 25% CAGR v/s 3.8% CAGR between FY06-09. The focus on
deepening its reach is a natural outcome of a return to its old asset classes, where
lending success depends on on-the-ground presence. The new businesses like rural
finance are also a benefit of this increased depth in presence.
Chart 24: Branch expansion post strategic realignment from FY10 has been
brisk till FY14 followed by current pause and consolidation
YoY Growth (RHS)
-20
100
-40
-60
Q3FY16
200
FY15
FY14
300
FY13
20
FY12
400
FY11
40
FY10
500
FY09
60
FY08
600
FY07
80
FY06
700
(%)
Number of Branches
East, 20%
South , 27%
West, 26%
North , 26%
19
ICICI Securities
Positioning the branch as the rightful heart of the business. The company
understands that in the product-segments it focuses on businesses are made or
broken at the branch level. To this end, the company has clearly de-lineated sales,
credit and collection responsibilities to separate heads at the branch level. They have
also introduced a branch P&L as the branch managers responsibility. This is to
manage motivation and reduce moral hazard at its most granular and critical level of
presence the branch.
Table 4: Organizational hierarchy of the network
Type of office
Category A
Category B
Category C
Nomenclature
Zonal Office
Regional Office
Area Office
Primary Responsibility
Controlling
Controlling
Controlling / Operational
Category D
Category E
Branch Office
Sub Branch Office
Operational
Operational
20
Additional Remark
Around 6 such offices
Around 20 such offices
Area Regional Manager/ Area Credit
Manager/ Area Collection Manager
Category E (+) Credit officer
~4-5 people (Sales, Collection, Cashier,
Branch Manager)
ICICI Securities
Business environment
Stress in the rural economy from consecutive weak monsoons
Some weakness in LCV segment
Serious weakness in the SCV segment (thanks to overcapacity)
Despite industrial slowdown, tailwind in HCV sales
Regulatory requirements of moving to tighter asset classification and
provisioning norms
Business outcomes
Asset quality at 120dpd significantly better than most peers
Loan AUM CAGR of 29.2% in last 5 years (FY11-15)
In recent times LCV business slack and SCV decline, compensated by sharp up
tick in Cars & MUVs and HCV business robustness
LAP business has scaled up fast to 30% of AUM and remains RoE accretive
(some segment risks remain though)
Asset classification and provisioning changes implemented on an accelerated
timeline way ahead of RBI stipulation
ROE has improved from 3.2% in the bottom of FY10 to 15.9% in FY15 and PAT
has registered a CAGR of 95% over the same period
Source: Company data, I-Sec research
21
ICICI Securities
The company has pre-emptively moved towards 90day GNPA recognition and
40bps standard asset provisioning at an accelerated pace far ahead of RBI
requirements as well as most peers
5.1
5.0
4.9
4.8
Q2FY18E
Q3FY18E
Q4FY18E
Q1FY17E
5.1
Q1FY18E
4.2
5.2
Q4FY17E
4.2
5.2
Q3FY17E
4.3
Q4FY16E
3.3
4.4
Q3FY16
3.1
Q1FY16
(%)
Q4FY15
Q2FY16
Q2FY17E
GNPA
3
2
1
0
22
ICICI Securities
Therefore we expect lower credit costs for Chola in FY17-18E, assuming that
provisioning norms do not change significantly, as the transition pain is largely already
absorbed.
Chart 28: Credit cost to reduce going forward
Credit Costs as a % of AUM
4
3.6
3.0
(%)
3
2.2
1.9
1.7
1.3
1.3
1.5
1.3
0.8
1
0.4
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
87
90
80
73
80
77
69
67
(%)
70
63
60
50
35
40
40
40
45
30
20
10
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
Provisioning %
0
10
20
30
50
23
ICICI Securities
Provisioning %
0
10
25
100
0
10
40
100
0
10
25
40
100
0
10
25
50
100
14
CE
HCV
Tractor
Older Vehicles
Refinance
3W & SCV
17
13
10
24
15
15
13
20
40
35
30
25
20
15
10
5
0
LCV
(%)
ICICI Securities
Firstly, we see possibility to improve its long term rating of AA. Peers with much
worse asset quality have one notch higher ratings despite similar levels of Tier-1
capitalization.
Table 8: Comparison of credit ratings with peers in the industry (Long term)
Credit Rating Analysis
Long Term
CRISIL
Cholamandalam Investments
AA
Shriram Transport
AA+
M&M Financials
AA+
Shriram City Union Finance
AASundaram Finance
AA+
Source: I-Sec Research, Industry sources
ICRA
AA
AA
AA
AA+
CARE
AAAA+
AAA
AA+
-
Commentary
While Shriram Transport, Sundaram Finance and
M&M Financials are rated slightly above
Cholamandalam and SCUF by the credit rating
agencies, even then Chola's current ratings are a
mark of strong long term stability.
Table 9: Comparison of credit ratings with peers in the industry (Short term)
Credit Rating Analysis
Short Term
CRISIL ICRA
Cholamandalam Investments
A1+
A1+
Shriram Transport
A1+
A1+
M&M Financials
A1+
Shriram City Union Finance
A1+
A1+
Sundaram Finance
A1+
A1+
Source: I-Sec Research, Industry sources
CARE
A1+
-
Commentary
Most of these NBFCs have a similar rating profile
for the short term horizon and enjoy a rating
indicative of a stable outlook.
Debentures
24%
Bank Term Loans
55%
Commercial
Paper
9%
Source: Company data, I-Sec research
25
ICICI Securities
Credit costs are likely to shift downwards from current estimates much more
drastically for most peers of Chola, in case of a cyclical recovery
Valuation for Chola is at a significant premium to most peers for similar RoEs. Rerating potential in case of a cyclical recovery is also therefore limited.
M&M Financial Services current GNPA is 2.1x its FY11-15 average, which is
therefore clearly close to a cyclical peak, even after adjusting for dpd reporting
norms. In the same period coverage has moved from 82.5% to 57.3%.
Chola unfortunately will not have the same delta in credit costs for FY17E, if the
business cycle turns for the better. The fact that credit costs for peers like Shriram
transport Finance is currently expected to be elevated in FY17E due to reporting
transition, while Chola would have likely completed the journey, reduces the delta to
an already fairly moderate credit cost expectation.
26
ICICI Securities
4.0
3.3
(%)
3.0
2.0
2.5
1.9
1.9
1.8
1.6
1.0
0.0
Cholamandalam
Shriram Transport
M&M Financials
(%)
12
10
8
6
13.5
15.4
15.0
Shriram Transport
M&M Financials
4
2
0
Cholamandalam
Source: Company data, I-Sec research
27
ICICI Securities
However, when we look at total implied leverage defined as total assets (including off
balance sheet) divided by shareholders funds, Cholas effective gearing is much
higher than peers.
Chart 34: Crucially, significantly higher total implied leverage (even after
including off-book assets)
Total Assets (excl off-book assets) / Shareholders Funds
Total Assets (incl off-book assets) / Shareholders Funds
8.5
9.0
8.0
7.6
7.2
6.4
7.0
6.5
6.7
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Cholamandalam
Shriram Transport
M&M Financials
The reason behind Cholas higher effective leverage is its higher use of bilateral
assignments which now no longer have a tier-1 capital implication, given absence of
credit enhancements. Since, the credit performance of the pools sold down under this
route have no direct bearing on Cholas financials, one may tend to argue that
significant leverage headroom remains. However, we feel that credit rating agencies
are unlikely to take this view and would indeed look at effective leverage
benchmarks. The fact remains that Chola would have to continue servicing all
originated loans, irrespective of whether they are sold down. An effective leverage
ceiling therefore keeps in check the extent to which its operating network is being
sweated.
28
ICICI Securities
800
2.7x
17x
600
700
600
13x
2.0x
500
300
May-15
Aug-14
Dec-13
Mar-13
Jul-12
Oct-11
Feb-11
0.8x
Apr-08
Jan-16
May-15
Aug-14
Dec-13
Mar-13
Jul-12
Oct-11
Feb-11
May-10
100
Sep-09
100
Dec-08
200
Apr-08
200
May-10
300
1.6x
400
Sep-09
7x
Dec-08
10x
400
(Rs)
500
Jan-16
700
(Rs)
RoE (%)
FY16E
FY17E
16.2
16.9
13.1
14.9
12.5
14.2
12.7
18.3
15.9
16.6
ICICI Securities
CAGR = 0.9%
7,000
(Rs mn)
6,000
5,000
4,000
3,000
2,000
1,000
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Units ('000)
100
80
60
40
30
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
20
ICICI Securities
17.6
17.8
FY12
FY13
17.1
16
(%)
12
8
4
0
FY11
FY14
One of the key theses about the commercial vehicle industry in India is that mid-level
tonnage classes will eventually get phased / squeezed out and the overall logistics will
work in a hub and spoke model with LCVs dominating the spokes and HCVs handling
transport between hubs. The driving factors of this transition will be.
Implementation of the GST removing interstate taxes for the large trucks leading to
the share of higher tonnage trucks going up within the HCV space, due to be
better cost benefit.
We feel that the near term fortunes of the LCV cycle will be closely linked to the
fortunes of the rural economy. This in turn would depend on
ICICI Securities
10
5
0
Q4FY18E
Q3FY18E
Q2FY18E
Q1FY18E
Q4FY17E
Q3FY17E
Q2FY17E
Q1FY17E
-10
Q4FY16E
Q3FY16
Q2FY16
Q1FY16
-5
15
Q4FY15
(Rs bn)
LCV AUM
54
52
50
48
46
44
42
40
6,000
(Rs mn)
5,000
4,000
3,000
2,000
32
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
1,000
ICICI Securities
Chart 42: Passenger car & MUV segment AUM has grown fast
Passenger Car & MUVs AUM
35
30
(Rs bn)
25
20
15
10
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
We are assuming a AUM CAGR of 12.5% over FY16E-18E given the relatively lesser
degree of cyclicality in this business versus commercial vehicles. Dependence, if any,
is to the rural income cycle and direct industrial activity related vulnerability is lower.
Mining activity is yet to pick up in a major way (some improvement has happened)
If the cash for clunkers program takes off, it could support new vehicle prices by
creating more buoyancy in the operator eco-system
Its share in AUM has been relatively stable at ~9% in FY14 and now as well. Its AUM
in this segment has registered a CAGR of 15.7% vis--vis overall vehicle finance AUM
CAGR of 6% over the same period.
33
ICICI Securities
Chart 43: Cholas market share in MHCV and Tractor financing segment (not
separately available for M&HCV)
Market Share (MHCV & tractors)
7.6
8
7
6
5.2
(%)
5
4
3.0
3
1.8
2
1
0
FY11
FY12
FY13
FY14
45
40
35
30
25
20
15
10
5
0
25
20
15
10
30
Q4FY18E
Q3FY18E
Q2FY18E
Q1FY18E
Q4FY17E
Q3FY17E
Q2FY17E
Q1FY17E
Q4FY16E
Q3FY16
Q2FY16
Q1FY16
Q4FY15
(Rs bn)
HCV AUM
34
ICICI Securities
Chart 45: Used vehicle finance expected to grow at ~15.4% over FY16-18E
Used Vehicles
30
15
(Rs bn)
25
20
10
15
10
0
5
0
35
Q4FY18E
Q3FY18E
Q2FY18E
Q1FY18E
Q4FY17E
Q3FY17E
Q2FY17E
Q1FY17E
Q4FY16E
Q3FY16
Q2FY16
Q1FY16
Q4FY15
-5
Chart 46: Refinance business AUM expected to grow at ~15.2% over FY16-18E
YoY Growth (RHS)
15
10
5
0
20
45
40
35
30
25
20
15
10
5
0
Q4FY18E
Q3FY18E
Q2FY18E
Q1FY18E
Q4FY17E
Q3FY17E
Q2FY17E
Q1FY17E
Q4FY16E
Q3FY16
Q2FY16
Q1FY16
-5
Q4FY15
(Rs bn)
Refinance
35
ICICI Securities
Over-invoicing at the dealers end has been a consistent problem that financing
companies have faced as asset values have often been overstated.
The countrys large size ensures that every year some part of India or the other
has a relatively low agricultural produce due to poor rainfall, drought etc.
With two consecutive weak monsoons and the overall weakness in the rural economy,
the company has shown some growth in its tractor AUM, albeit at a slower pace than
its overall growth rate. We build in a small recovery in FY17E and 9.5% AUM CAGR
over FY16E-18E.
Chart 47: Tractor AUM expected to grow at 9.5% over FY16-18E
Tractor AUM
(Rs bn)
20
15
15
10
10
5
Q4FY18E
Q3FY18E
Q2FY18E
Q1FY18E
Q4FY17E
Q3FY17E
Q2FY17E
Q1FY17E
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q4FY16E
20
25
ICICI Securities
4,500
4,000
(Rs mn)
3,500
3,000
2,500
2,000
1,500
1,000
500
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
25
20
(Rs bn)
15
10
5
Q3FY16
Q2FY16
Q1FY16
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
37
ICICI Securities
Annexure 2: Financials
Table 11: Profit and Loss Statement
(Rs mn, year ending March 31)
Particulars
Interest earned
Interest expended
Net interest income
FY14
32,226
17,711
14,515
FY15
36,638
19,604
17,034
FY16E
41,158
20,390
20,768
FY17E
45,787
21,691
24,096
FY18E
51,112
23,648
27,463
402
274
148
170
196
Staff cost
Depreciation
Other operating expenses
Total operating cost
1,875
236
4,471
6,582
2,217
292
4,979
7,489
2,505
202
5,785
8,491
2,988
219
5,839
9,046
3,631
247
6,312
10,190
Pre-provisioning op profit
8,335
9,819
12,424
15,220
17,469
2,833
3,247
4,485
4,584
4,502
5,502
5,502
6,572
6,572
7,939
7,939
10,636
10,636
12,966
12,966
Income taxes
1,862
2,221
2,727
3,616
4,409
3,640
4,352
5,211
7,020
8,558
FY14
1,433
21,514
22,947
FY15
1,437
30,289
31,727
FY16E
1,562
34,535
36,097
FY17E
1,562
40,477
42,038
FY18E
1,562
47,722
49,284
1,80,932
1,94,752
2,22,866
2,53,581
2,89,629
3,515
8,074
3,858
8,388
6,132
8,602
8,256
8,328
9,941
8,724
2,15,468
2,38,732
2,73,697
3,12,203
3,57,578
1,94,281
2,21,835
2,50,883
2,86,525
3,28,677
Investments
Cash and Balance
824
8,008
675
3,407
615
4,317
692
4,859
779
5,468
729
11,625
683
12,132
1,006
16,877
1,133
18,995
1,275
21,379
2,15,468
2,38,732
2,73,697
3,12,203
3,57,578
Other income
PAT
Source: Company data, I-Sec research
Fixed Assets
Current & other assets
Total Assets
Source: Company data, I-Sec research
38
ICICI Securities
FY14
FY15
FY16E
FY17E
FY18E
22.4
8.2
16.4
31.1
6.7
44.9
18.7
18.7
9.5
(2.3)
14.3
17.4
(32.0)
17.8
19.5
19.2
12.9
19.7
14.5
21.9
(46.0)
26.5
19.8
10.2
14.2
15.3
14.2
16.0
15.0
22.5
34.7
34.7
14.7
14.9
14.7
14.0
15.0
14.8
21.9
21.9
6.9
17.2
10.6
6.6
5.0
7.0
16.8
10.4
6.4
5.3
7.7
16.5
9.8
6.7
5.0
7.8
16.0
9.1
6.9
5.0
7.8
15.6
8.7
6.9
5.0
Operating efficiencies
Non-interest income as % of net income
Cost to income ratio (%)
Op.costs / avg AUM (%)
No of employees (including off rolls)
Average annual salary (Rs)
Annual inflation in average salary(%)
Salaries as % of non-int. costs (%)
NII /employee (Rs mn)
AUM/employee(Rs mn)
2.7
44.1
3.1
11,187
1,67,604
15.7
28.5
1.30
20.8
1.6
43.3
3.1
13,090
1,69,395
1.1
29.6
1.30
19.4
0.7
40.6
3.1
13,489
1,85,703
9.6
29.5
1.54
21.3
0.7
37.3
2.9
15,180
1,96,820
6.0
33.0
1.59
21.6
0.7
36.8
2.9
17,084
2,12,566
8.0
35.6
1.61
22.0
Capital Structure
Debt-Equity ratio
Leverage (x)
CAR (%)
Tier 1 CAR (%)
Tier 2 CAR (%)
Tier 1 Capital (Rs mn)
Tier 2 Capital (Rs mn)
RWA
7.9
9.4
17.2
10.5
6.8
20,793
13,475
1,98,852
6.1
7.5
21.2
13.0
8.2
29,712
18,773
2,28,222
6.2
7.6
19.8
12.8
7.0
33,557
18,392
2,62,749
6.0
7.4
20.1
13.1
7.0
39,180
20,980
2,99,715
5.9
7.3
20.4
13.4
7.0
46,066
24,029
3,43,275
1.9
0.7
4,418
1,628
2.3
0.8
63.2
1.34
3.1
2.0
7,890
5,091
3.6
2.3
35.5
1.33
4.2
2.5
12,042
7,225
4.8
2.9
40.0
1.66
5.1
3.0
16,618
9,971
5.8
3.5
40.0
1.49
4.8
2.6
18,077
9,942
5.5
3.0
45.0
1.28
1.8
17.1
13.8
1.9
15.9
11.6
2.0
15.4
13.5
2.4
18.0
12.8
2.6
18.7
12.8
25.4
25.6
160.1
4.1
0.5
27.9
23.3
203.1
3.2
0.5
33.4
19.5
231.1
2.8
0.7
44.9
14.4
269.1
2.4
0.9
54.8
11.8
315.5
2.1
1.1
39
ICICI Securities
40
FY14
15.3
8.4
6.9
1.3
5.5
3.1
2.4
0.2
2.6
0.0
2.6
33.8
1.7
9.9
17.1
FY15
15.0
8.0
7.0
1.3
5.7
3.1
2.6
0.1
2.7
0.0
2.7
33.8
1.8
8.9
15.9
FY16E
15.2
7.5
7.7
1.7
6.0
3.1
2.9
0.1
2.9
0.0
2.9
34.4
1.9
8.0
15.4
FY17E
14.9
7.0
7.8
1.5
6.3
2.9
3.4
0.1
3.5
0.0
3.5
34.0
2.3
7.9
18.0
FY18E
14.5
6.7
7.8
1.3
6.5
2.9
3.6
0.1
3.7
0.0
3.7
34.0
2.4
7.7
18.7
ICICI Securities
Management
Name
Designation
Managing Director
Description
Has over 42 years of varied experience in fields of banking, finance, economics,
technology, human resource, marketing, treasury and administration. He has served
as the former Chairman and Managing Director of Canara Bank and Indian Bank.
He joined Chola Board in July, 2010.
Has over 21 years of experience in the varied fields of technology, projects and
financial services. He has worked with Mckinsey and Company and Sundram
Fasteners. He joined the Board of Chola in August, 2010.
Is a graduate in Commerce, an Associate member of the Institute of Chartered
Accountants of India. He has more than 20 years of experience in fields of finance
and strategy and has a long association with Murugappa group. He has been
serving as the CFO since October 2008.
Date
Type
Year 2003
Rights Issue (1:2)
Year 2004
Rights Issue (1:2)
Year 2007
Rights Issue (3:8)
Year 2008
Conversion of Share Warrants
Year 2010
Preferential Allotment (IFC, TII)
Year 2010
Preferential Issue to PE Investors & AMCs
Year 2013
Issue to QIB
Year 2015
Preference Share Conversion
Source: Company data, I-Sec research
Proceeds
(Rsbn)
2.95
6.96
19.92
13.52
40.02
15.00
30.00
50.00
1990
1992
Commenced Vehicle
Finance Business
1995
Commenced Chola
Securities
1995
1997
Commenced Chola
AMC
2006
JV with DBS Bank
Singapore.
Commenced
Consumer Finance
2005
2010
Sold AMC.
Focus on Secured
lending Lines (Vehicle
Finance, Home Equity)
2007
2007
Commenced Home
Equity Business
2010
2009
Exited Consumer
Finance business
2011
AFC status received
JV with DBS exited
2014
Total AUM
crossed Rs250bn
2012
2016
2012
Launch of Tractor
and Gold Loan
41
ICICI Securities
Charts
Chart 1: Overall Cholamandalam loan AUM mix .................................................................. 3
Chart 2: New vehicle finance market share has increased steadily ..................................... 4
Chart 3: Market Share Trend in LCV and MHCV segmentsreflects the overall strategic
reaction to cyclical realities ............................................................................................. 5
Chart 4: Flexibility to switch segment focus, hedges the overall portfolio growth against
economy driven risks to individual segments .............................................................. 5
Chart 5: Credit costs increasing sequentially in last two years ............................................. 6
Chart 6: NIM has improved ................................................................................................... 6
Chart 7: Segmental pre-tax RoA has reduced but not collapsed ......................................... 6
Chart 8: Vehicle finance AUM growth over FY16E-FY18E to remain healthy but not
spectacular ...................................................................................................................... 7
Chart 9: Housing business AUM grew at a very fast pace................................................ 8
Chart 10: as evidenced by a high disbursements growth in segment .............................. 8
Chart 11: Higher NIMs supported by higher yields in vehicle finance business ............... 9
Chart 12: but higher operating costs associated with vehicle finance ........................... 9
Chart 13: and credit costs are significantly higher .......................................................... 10
Chart 14: Home Equity Loans, a higher RoA business for the company ........................... 10
Chart 15: Home equity interest yields remain moderate a good sign .............................. 12
Chart 16: NPA levels (120 days) vis--vis peers ................................................................ 13
Chart 17: A higher expenditure on strengthening recovery efforts has helped the asset
quality to remain healthy A STITCH IN TIME, SAVES NINE ................................... 14
Chart 18: AUM per employee has stabilised ...................................................................... 14
Chart 19: Operating costs as a % of AUM .......................................................................... 15
Chart 20: Business origination expense as a % of disbursements remain constant over the
period ............................................................................................................................ 15
Chart 21: Operating expense excluding business origination & collection costs has fallen
as a % of AUM .............................................................................................................. 16
Chart 22: Technology impact map ...................................................................................... 17
Chart 23: Cholas positioning in the vehicle finance space ................................................ 18
Chart 24: Branch expansion post strategic realignment from FY10 has been brisk till FY14
followed by current pause and consolidation ............................................................. 19
Chart 25: A truly diversified geographical presence ........................................................... 19
Chart 26: Branch distribution map ...................................................................................... 20
Chart 27: We expect transition to 90dpd GNPA recognition in H1FY17 ............................ 22
42
ICICI Securities
43
ICICI Securities
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BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return
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