Up To 23% Upside! Here’s Why Motilal Oswal Is Bullish On This NBFC Stock

The Indian stock market is likely to remain turbulent in the short to medium term, owing to wide price fluctuations and intense trading, and while investors should be careful regarding buying stocks, leading brokerage house Motilal Oswal is bullish on Cholamandalam Investment and Finance Company Ltd's shares. The brokerage has predicted that from the market price of Rs. 568, the stock would reach a target price of Rs. 700, resulting in a gain of 23%.

Motilal Oswal’s take on Cholamandalam Inv & Fin

The brokerage has reported that "Cholamandalam Investment & Finance (CIFC) is a franchise we have always felt very strongly about owing to its ability to play different credit cycles better than its peers. We particularly like that even within Vehicle Finance, it very tactically turns Underweight/Overweight in different product segments to deliver industry-leading growth and the most benign credit costs. Understandably, CIFC's disbursements in the recent quarter (2Q) were propped up by strong disbursements in the LAP segment. However, one also needs to understand that the LAP franchise has been strengthened significantly in the last two years."

Accordion to the research analysis of Motilal Oswal "CIFC's performance in disbursements (including LAP and Home Loans) has been superior v/s peers, while collection efficiency (CE) has consistently been 100%+ for the past few months. Macro indicators, such as e-way bills (despite the seasonal decline seen in Nov'21 post the festive season) and GST collections, also indicate strong recovery. The company, very strategically, keeps working on its product mix to ensure healthy blended yields. Going forward, while there would be only a minor benefit in cost of borrowings, coupled with the normalization of excess balance sheet liquidity, this would lead to stable margins."

According to the research report of the brokerage "CIFC posted a 20% AUM CAGR over FY16-21, while the normalized RoA profile (adjusted for one-off COVID provisions) improved to ~2.6% (in FY22E) from ~2.0% (in FY15). CIFC is well-diversified across product segments as well as geographies. Importantly, it has delivered the best asset quality among peers across credit cycles as well as in times when the external environment has been tough. The impact of newer variants / COVID waves is a known unknown; however, the levels of provisions carried by CIFC today give us comfort that any newer disruption in the economy should not lead to outsized credit costs. The stock trades at 3.5x FY23E P/BV, above its 10-year average of 2.5x. Given CIFC's ability to deliver industry-leading growth in the loan book (CAGR of 13% over FY22-24E) - coupled with its strong asset quality (expected credit cost of ~1% over FY23-24E) and consequently healthy RoE of ~19% - we believe it would continue to command premium valuations relative to its listed peers in Vehicle Finance."

Buy Cholamandalam Inv & Fin With A Target Price of Rs. 700

The brokerage has claimed that "CIFC is likely to continue to grow faster than peers over the medium term, in our opinion. Its asset quality performance and the consequent credit cost would be significantly better v/s peers. With RoE of ~19% over the medium term, its return ratios are among the best. The company is well-capitalized with a CRAR of 19.6% and would not need any equity growth capital over the near term."

As per the report by Motilal Oswal "Given CIFC's ability to deliver industry-leading growth in the loan book - coupled with its strong asset quality (credit cost of ~1% over FY23-24E) and consequently healthy RoE of ~19% - we believe CIFC would continue to command premium valuations relative to its listed peers in Vehicle Finance. We maintain a Buy rating, with a TP of INR700 (3.9x Sep'23E BVPS). Key risks include a) a potential third COVID wave leading to localized lockdowns and disruptions in the economy and b) a prolonged shortage of semiconductor chips leading to continued supply-side issues in passenger vehicles and small commercial vehicles."

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.