We met with the management of Cholamandalam Finance (CIFC) and maintain our positive stance backed by healthy growth (20%) and improved profitability (RoE of 21% over next 2 years). CIFC has been gaining market share in LCV/SCV segment, while losing share in HCV segment where it has consciously slowed down (due to lower underlying demand and rising cost of funds). Presence across CV segments would help company tide over the temporary slowdown in HCV segment.

CIFC saw no major impact of tight liquidity and expects to grow its AUM by 20%+ in FY20 supported by 22% y-o-y growth in vehicle book and 14-15% y-o-y growth in home equity book. Management expects demand to pick up in CVs (particularly in LCVs/SCVs) in H2FY20 on pre-buying due to transition to BS-VI emission norms.
Well positioned to benefit from distracted competition

(i) 30%+ growth in vehicle finance book has largely been driven by market share gain from unorganised sector and geographic expansion; while home equity AUM grew by 7% (Q3FY19), (ii) Vehicle finance’s profitability is likely to be maintained at current level (ROTA PBT at 3.5%), (iii) Likely to raise capital when Tier 1 hits 11.5% (Q3FY19: 13.1%), and (iv) During tight liquidity (September 2018), CIFC maintained excess liquidity with surplus cash at `45 bn which has been brought down to `27 bn and is likely to be maintained at this level.

Reiterate BUY with TP of `1,550

We continue to like CIFC for its well diversified vehicle finance book, voluntary slowdown in home equity portfolio, investments in technology (that will drive operating leverage) and focus on building newer products lines like trip finance and two-wheeler loans. Incrementally, focus on maintaining NIM and retaining ample liquidity will aid future growth. At CMP, CIFC trades at 3.2x/ 2.6x FY20e/FY21e ABV.

Portfolio strategy: Well-poised for next leg of growth

LCV portfolio composition: 40% Eicher, 30% Tata and remaining 30% to Ashok Leyland/Swaraj Mazda.
Pick-up vehicle portfolio composition: 70% Mahindra, 25% Ashok Leyland and remaining to smaller players.
Cars: Maruti/Hyundai only and that to at entry-level segment only.
Two-wheelers: CIFC finances ~7,000 units of Royal Enfield per month vs. ~10,000 units by HDFC Bank..
Branch expansion largely at E category level as these category branches graduate to bigger branches; 100-120 branches addition each year.
Vehicle Finance profitability (ROTA) is likely to be maintained at current level (ROTA PBT at 3.5%).