HDFC Mutual Fund-Backed NBFC Stock Gets Buy Call From Motilal Oswal: Do You Own?

Cholamandalam Investment and Finance Company Ltd is a large-cap company in the NBFC sector with a market cap of Rs 97,989.39 Cr during Friday's closing session. The stock closed on Friday at Rs 1167.15 apiece and the stock has gained 60% YTD, However, the brokerage firm Motilal Oswal has fixed a target price of Rs 1,420 which implies a potential upside of around 22% from its current market price of Rs 1167.15.

"Cholamandalam Finance (CIFC) has taken a successful leap forward in reducing the cyclicality, which was inherent in its core vehicle financing business. Non-auto product segments now account for ~40% of the loan mix, which includes ~11% from new businesses of Consumer and Small Enterprise (CSEL), SBPL and SME (incorporated in Jan'22)," said the brokerage.

"As of Sep'23, AUM of new businesses rose ~180% YoY (albeit on a small base) to ~INR133.3b. Among new businesses, CSEL accounts for ~7% of total AUM. CSEL typically has two sourcing channels: 1) Traditional branch and DSA-led sourcing, and 2) Partnerships with fintechs and consumer-tech. CIFC and other lenders in this product segment have acknowledged higher delinquencies and stress build-up in the partnership-led CSEL business, which makes up ~25% of total CSEL AUM of ~INR82b," the brokerage note stated.

"GS3 in CSEL (traditional) stood at 0.82%, whereas GS3 in CSEL (partnerships) stood at ~4.7%. CIFC management has already initiated corrective actions in the CSEL portfolio, where NPL levels are still well within the industry norms. Beyond the jitteriness in CSEL asset quality, we believe that CIFC is well poised to deliver a healthy loan growth across all its product segments. We estimate the non-auto product segments to grow faster than vehicle finance and the share of vehicle finance to decline to ~55% by FY26 (vs. ~61% as of Sep'23)," Motilal Oswal said in a note.

"We expect NIM to expand going ahead, as 1) yields improve, aided by better product mix and repricing of fixed-rate vehicle loans; and 2) the cost of borrowing (CoB) peaks out after the minor impact of the RBI circular on higher risk weights on bank loans to NBFCs. We estimate NIM to improve to 7.2%/7.3% in FY25/FY26 (vs. ~6.9% in FY24E)," stated the brokerage.

Commenting on the outlook of the stock, the brokerage said "We model a CAGR of 27% in AUM and 31% in PAT over FY23-FY26E, with RoA/RoE of 2.8%/21.5% in FY26E. CIFC is well-diversified across product segments and geographies. Notably, it has delivered the best asset quality among peers across the various phases of the credit cycle. The stock trades at 4.2x 1-yr forward P/BV, above its 10Y/5Y/3Y average of 3.0x/3.2x/3.7x. Given its ability to deliver industryleading growth in the loan book, strong asset quality (expected average credit cost of ~1.2% over FY25-26E) and healthy RoE of ~22%, we believe CIFC should continue to command a premium valuation in the sector. We reiterate our BUY rating with a TP of INR1420 (4.3x Sep'25E BVPS)."

During Q2FY24, the company reported promoters' shareholding of 51.43%, FIIs stake of 21.51%, DIIs stake of 20.04% and public stake of 7.03%. As per the shareholding pattern of Cholamandalam Investment and Finance Company, Motilal Oswal Nifty Next 50 Index Fund held 1,32,36,173 shares or 1.61% stake, AXIS MUTUAL FUND TRUSTEE LIMITED A/C AXIS MUTUAL F held 3,69,65,307 shares or 4.49%, SBI Arbitrage Opportunities Fund held 1,35,26,983 shares or 1.64%, HDFC LARGE AND MID CAP FUND held 1,77,21,131 shares or 2.15% stake, CANARA ROBECO MUTUAL FUND A/C CANARA ROBECO EMERGI held 85,71,061 shares or 1.04% and ADITYA BIRLA SUN LIFE TRUSTEE PRIVATE LIMITED A/C held 89,37,094 shares or 1.09% stake in the company.

Disclaimer

The recommendations made above are by market analysts and are not advised by either the author, nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.