Cholamandalam spreads its wings to come up trumps in a difficult market

The stock of Cholamandalan Investment and Finance Company or Chola Finance has appreciated by 40 per cent in the last six months. The Street’s faith on the stock increased significantly post a better-than-peers December quarter (Q3). In what was arguably been a difficult period for the sector, Chola Finance expanded its assets under management (AUM) by 27 per cent year-on-year, while ensuring that net profit growth and profitability (net interest margin) were maintained at 39 per cent and seven per cent respectively. This is even as loan disbursements shrunk by 13 per cent year-on-year, due to a slowdown in vehicle finance. Chola Finance’s superior show could make it the preferred pick in the sector.

Diversification, whether in terms of loan book or geographies, has been a key factor supporting to Chola Finance’s growth. From being concentrated on commercial vehicle finance, the financier now has exposure to all forms of vehicle financing, apart from home loans and other loans. It has reduced the share of lending to light commercial vehicles (LCVs) from 29 per cent to 22 per cent and has made its offering more flexible in other categories such as cars (mainly entry-level), three-wheelers and commercial equipment. Chola Finance has lately forayed into two-wheeler financing and analysts at Axis Capital note that its run-rate of financing about 7,000 units Eicher motorcycles a month is quite close to that of the market leader – HDFC Bank (10,000 units a month). Chola Finance is also well-distributed across regions, which has helped it wade over region-specific slowdowns.

But there could be some bumps in the interim. Analysts at Emkay Financial Services say incremental growth may be slightly slower, on the back of high base, and growth going forward could be on the back of BS VI implementation. They expect loan growth to decline from the current 30 per cent mark to 25 per cent in FY20.

Likewise, with nearly 80 per cent of revenues from rural markets, a muted demand in these pockets could hurt. For investors, the sharp re-rating of multiples (3x FY20 book) is also a concern and they could consider the stock on dips.

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