Buy This NBFC Stock As SME Lending Opens-up New Opportunities

Broking firm Motilal Oswal is betting on the NBFC stock of Cholamandalam Investment and Finance for good returns. According to the brokerage strong disbursement growth is a positive for the company.

Good quarterly numbers

Cholamandalam Investment and Finance reported a 3QFY22 net profit of Rs 5.24 billion (8% miss), down 14% QoQ, but up 28% YoY. Despite an in line NII/opex/PPOP, this miss was on account of higher than estimated credit costs of Rs 2.5 billion (140bp). Credit costs included additional management overlay of Rs 1.36 billion.

"Core spreads improved by 10bp QoQ, but declined 30bp YoY to 7.6%. Notably, there was a 35bp QoQ decline in the cost of borrowings to 6.5%, which mitigated the 20bp QoQ decline in yields

Excluding the impact of the RBI circular, GS3/NS3 improved by 30 basis points each to 5.85%/3.6%, with a decline of 260bp QoQ in S2+S3 loans to 16.2% (including the restructured pool). Incremental restructuring stood Rs 1 billion in 3QFY22, with the aggregate restructured pool Rs 48 billion (6.6% of assets under management). ECLGS disbursements were insignificant in 3QFY22," Motilal Oswal has said.

Best NBFC play

Cholamandalam Investment and Finance is the best play among the asset financiers, according to Motilal Oswal. "Given its presence in Vehicle Financing, LAP, and Home loans, it has been able to deliver consistently healthy growth in disbursements by strategically going underweight/overweight on product segments. The second COVID wave has exacerbated asset quality stress for Vehicle/LAP financiers, but Cholamandalam Investment and Finance's ability to recover from that stress, without any significantly higher credit-costs (write-offs), gives us confidence that this time it will be no different," the brokerage has said.

Key risks for the share price

The only risk that Motilal Oswal's sees is if the regulator mandatorily directs NBFC and housing finance companies to classify the loans tagged as NPA (after implementation of the circular) under Stage 3.

"That would lead to higher provisioning to meet the RBI advised net Stage 3 of less than 4% by FY22-end," the brokerage has said in its report.

The shares of Cholamandalam Investment and Finance were last seen trading at Rs 638.

Disclaimer

Investing in equities is risky and investors must therefore understand the risk. The author and Greynium Information Technologies Pvt Ltd would not be responsible for any losses caused based on the article. The author and his family do not hold shares of Cholamandalam Investment. Investors should exercise caution on account of heightened volatility in the markets currently.