Stock To Buy: This Mid Cap Financial Stock Gets 'Buy' Call For 19% Potential Gains

The brokerage firm, ICICI Securities in its recent report on Cholamandalam Investment & Finance Company Ltd has recommended investor buy the stocks of the company for a target price of Rs 743/share. Cholamandalam Investment's (Chola) main narrative in FY23 and possibly in near future will be that of "Expanding Horizons". This is amply reiterated in its FY22 annual report.

Stock Outlook

The stock of Cholamandalam Investment is currently trading at Rs 624.55/share, opened at Rs 624.90/share. The previous close was 620.20/share. The 52-week low and high of the stock are rs 469.25/share and Rs 768/share, respectively. In early FY 22-23, the stock touched the 52-week high.

The ROE of the stock is 18.29%. TTM EPS is Rs 26.23.PE ratio is 23.78. PB ratio is 4.33. Its face value is Rs 2. Cholamandalam Investment & Finance is a mid-cap stock with a market capitalization of Rs 51,610 crore.

As of July 13, 2022, the stocks of the company have given 20.44% in the past 1 year and 171.66% in the past 5 years, respectively. Over the last 1 week, it has given negative returns of 2.46% and a positive return of 3.12% in the past 1 month, respectively.

ICICI Securities has estimated a target price of Rs 743/share, considering this, if an investor buys the stock at the Current Market Price, the stock can surge 19% in 12 months.

Financial Year 2022

FY22 has been a year of "Expanding Horizons" for Chola. Chola extended beyond traditional segments and explored new horizons to cater to the changing needs of customers. It launched two new businesses, a consumer and small enterprise loan (CSEL) and secured business and personal loan (SBPL). It acquired Payswiff Technologies and also invested in Paytail Commerce to participate in the fintech space. With focus on endto-end digitisation, Chola continues to push digital transformation at the forefront.

The strategy has merit considering that the overall growth in non-vehicle segment has been much higher than vehicle. While the actual growth in FY22 or estimated growth in FY23/24 is strong for vehicle segment, the meagre 14% CAGR between FY18- 22 and the inherent cyclical nature of vehicle finance does warrant need for diversification. This is illustrated by the fact that growth in other segments has been better for Chola as LAP/home loan AUM grew at 14%/52% CAGR during FY18 to FY22, respectively.

New initiatives

New initiatives aim to provide a complete ecosystem for consumer and small enterprises beyond reach of formal credit yet. The CSEL segment will offer unsecured loans to salaried/self-employed professionals and micro and small enterprises through term and flexi loans. The SBPL segment will offer secured loans on the basis of credit assessment and cashflow projections and will target new-to-credit customers primarily in tier II/III cities. The SME segment will help working capital and capex requirements of SMEs. All these segments (except SBPL) will work through a combination of traditional and new age fintech partnerships. The acquired Payswiff Technologies (PAYSWIFF) complements the same as it is engaged in the business of enabling online payment gateway services for e-commerce businesses and provides ecommerce solutions.

Well-distributed branch presence. 1,145 branches of Chola are geographically well diversified with 28%/22%/23%/26% branches being present in south/north/west/east regions, respectively. Out of 1,145 branches, 1,093 belong to vehicle finance (VF), 388 (380 co-located with VF) to LAP, and 217 (177 co-located with VF) to home loan. Disbursement/NIM/PAT per branch has grown at a CAGR of 2%/11%/15%, respectively, from FY18-FY22 to Rs310mn/Rs51mn/Rs19mn as of FY22.

 

Analytics functions established key solutions in FY22

Analytics functions established key solutions in FY22 to complement the enhanced need for new segments.

1. Acquisition Scorecard models built and implemented across business verticals to automate the decisioning mechanism with consistent and improved customer selection. This should help the company segment applicants based on risk, and afford a faster on-boarding journey for lowrisk segments.
2. Early warning models designed and developed as a part of enhanced collection strategy, thereby, enabling a segmented treatment that helps to map the right collection effort with a given customer group.

Other digital initiatives to enhance operating efficiencies

1. Increasing usage of homegrown automation scripts, robotic-process automation tools and cognitive automation solutions.
2. Scalable big data repository is being established to serve data management, data access, and analytics needs.
3. Upgradation of systems with host of integrations
4. Introduction of GST and bank statement analysis along with dedicated customer-facing application.
5. Online payment modes of collections have been introduced for customers.
6. Online portals have been introduced to liaise and share documents with vendors.
7. Employees have been provided with mobile tab devices.
8. Digital tools/applications have been introduced to minimise physical presence at branch office.

NIMs - effect of fixed asset side, increasing cost of funds and new segments

Chola's 50% borrowings are fixed in nature and 20% are linked to MCLR with only 30% borrowings being linked to external benchmark. Consequently, it can be concluded that rising rate impact might come at a lower pace for Chola. On the asset side, VF contributes 69% to AUM and is fixed in nature; however, 1/3rd AUM runs down annually giving an opportunity to lend newer loans at a higher rate against relatively longer tenure borrowings. Nearly 29% of AUM is LAP/home loan which is floating interest in nature, hence, rising rate impact will be lower for these businesses' NIMs. With the expansion of new businesses carrying potentially higher yields, Chola's NIMs can either remain flat or little higher in spite of rising interest rate environment.

Gaadi Bazaar

Gaadi Bazaar (an initiative by Chola) is an online platform for buyers, transporters, drivers, brokers/dealers and others to buy or sell automobiles. It facilitates direct interaction between buyers and sellers along with end-to-end financial assistance enabling smooth selling at a fair market price. Users have easy access to buyer/seller information. All further transactions are decided and carried out between buyer and seller with no intervention from the platform. It has over 1mn downloads on Android Play Store with 4.1 rating and 18k reviews.

Brokerage Suggest Buy For Target Price of Rs 743/share

While diversification cuts across as a common business strategy for vehicle financiers, Chola possibly outperforms peers in presenting more concerted efforts and outcomes like (1) already significant progress (12% of total disbursements in Q4FY22) in new segments, (2) complementary acquisitions like Payswiff and (3) stress on building complementary organic skill through analytics appropriate to new segments like Acquisition Scorecard, early warning models and also requisite hiring. The company stresses on "ambitious growth plans for FY23". Successful execution of these strategies will cement the high multiples (3.5x 1 year forward P/B vs 1.5x average for other major listed vehicle financiers) enjoyed by the company. The combination of CV up cycle and well drafted new segment strategy does offer earnings tailwinds in FY23. Risks include high inflation leading to low demand and less-than-optimum outcome in new segments.

Disclaimer

The stock has been picked from the ICICI Securities brokerage report. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.