This Midcap NBFC Stock Grew 128.58% In 3 Years, Axis Securities Recommends Buy, Sees Robust Gains

Axis Securities has assigned a buy call on the stock of Cholamandalam Investment and Finance Company Limited (CIFC) for gains up 12% with a target price of Rs 793 per share.

CIFC, part of the prestigious Murugappa Group, is one of the premier diversified non-banking finance companies in India, engaged in providing vehicle finance, home loans and Loan against property. The Company has a strong network of 1151 branches spread across the country with an employee strength of 38000+. CIFC is a mid-cap NBFC having a market cap of Rs 58,564.52 crore.

Stock Outlook & Returns

The current market price (CMP) of CIFC stock on NSE is Rs 713.10 per share, trading 1% down from its previous close of Rs 720.30 per share. Today it opened at Rs 720.30 per share. The stock is trading near its 52-week high level. Its 52 week high was recorded on 6 September 2022 at Rs 817.75, while, its 52-week low level was recorded on 20 December 2021 at Rs 469.25.

 
The stock in 3 months has fallen 9.39%. Over a year, it has given 31.59% positive return. In the past 3 years, it has given 43.92% multibagger return and in 5 years it gave 177.44% multibagger returns.

Robust disbursement momentum

For Q2FY23, Disbursements were strong, up 68% YoY to Rs 146.2 Bn, led by vehicle book (up 38% YoY, 58% share) and LAP and SME book (up 38% YoY, 15% share). In the housing business, disbursements grew by 23% YoY. Supported by recovery in macroeconomic environment and improved freight availability, the growth momentum in the commercial vehicle segment is expected to remain strong. Furthermore, the management expects the passenger vehicle (Car and MUV) segment is poised for an all-time high in sales this fiscal. This would be aided by improved consumer sentiments, festive demand, and the easing of semiconductor supply. In the LAP segment, Management expects the low-ticket LAP would perform better than the high-ticket LAP as the former is linked to essential services. We expect the Company to exhibit strong set of disbursement performance in the coming quarters.

High yield products to support NIMs

The management expects the cost of funding to increase by about 60-70bps in FY23 as compared to FY22. Thus, NIM is expected to decline in the next 2-3 quarters. However, change in the product mix would be carried out depending on the demand in the geography, which would support an increase in the NIM. On the sustainability of NIMs, the management highlighted that the LAP and housing finance segment have floating rates and thus the management can pass the rate hike in such segments. However, given vehicle finance business consists of fixed interest rates, the management's focus would be to grow in highyield segments to boost/maintain yields. We believe with the focus on growing high yield new business segments (~5% of the total AUM), the Company would be able to maintain NIMs over medium term

Strong Balance Sheet to support growth

CIFC remains well capitalized with CAR at 18.4% in Q2FY23 with Tier 1 capital at 15.8%, creating enough room to support strong growth momentum for FY23. Management indicated that CIFC will continue to depend on banks for funding and there are no plans to change the liability mix given its strong credit rating profile. The share of debentures in overall borrowings has gone up from 14% to 18% YoY as a result of keeping up SEBI's norm that 25% of incremental borrowings should come from market borrowings. Further, as long as CIFC touches CAR of 13% company would not need to raise capital, thus the current balance sheet is strong enough to continue support growth.

Outlook & Valuation

CIFC is witnessing increasing disbursements which will help grow its AUM moving forward. The company has managed the Covid-19 pandemic well, thanks to its well-diversified portfolio, robust capitalisation, comfortable liquidity, and cost rationalisation initiatives. The expectation of an increase in the cost of funds, Opex at an elevated level and maintaining NIM in an increasing interest rate scenario would pose a challenge to CIFC. However, management commentary on CIFC growing at a higher rate than the industry because of value growth in terms of inflation and cost of the vehicle as well as growth in market share was encouraging. CIFC with its conservative management, comfortable liquidity position, and diversified portfolio mix is well-placed to ride on the expected demand recovery.

Axis Securities said, "We recommend a BUY rating on the stock with a target price of Rs 793/share, implying an upside of 10% from the CMP."

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. 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 making any investment decision.