Cholamandalam Fin. rating ‘Reduce’: Yet another strong showing by company

By: |
New Delhi | August 6, 2018 1:35 AM

Estimates raised by 1-5%; softer business momentum to open up better entry points into quality stock.

Moderating business momentum will open up better entry points into this high-quality franchise.

High growth, expense management and lower provisions have driven strong (36%) earnings growth for Chola. With peaking growth and NIM pressure, we expect the overall earnings momentum to moderate from current high levels even as expense-management measures and strong control over asset quality partially offset this. The impact of transition to Ind-AS is limited besides change in representation of accounts. We retain Reduce rating with TP of Rs 1,500 (unchanged) and believe that a moderating business momentum will open up better entry points into this high-quality franchise.

Business momentum to moderate from current highs: Cholamandalam (Chola) has reported 30% growth in loans driven by 38% growth in vehicle finance and low (8%) but improving growth in home equity. We believe that a high base, slowdown in new CV sales and moderation in used vehicle loans will put pressure on growth in the vehicle finance business over the medium term. Higher contribution from the home equity business, which is limping back to double-digit growth and NPL recoveries therein, will provide a boost; net result, we expect loan growth to moderate to 25% in FY2019e with earnings growth at 21-23% over FY2019-21e.

Tweak estimate: We are raising our estimates by 1-5% to factor recent business trends and changes due to Ind-AS. Post the revision, we expect the company to deliver 24% EPS CAGR during FY19-21e and medium-term RoE of 21-22%. While we like the franchise, we await better entry points to get into the stock; moderation in its business momentum and NIM pressure will open up better entry points, we believe.

Kotak Institutional Equities

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Why traditional banks need to partner with fintech firms for delivering essential banking solutions
2“Big Basket lost 80 pc of workforce within 2 days of lockdown, bounced back with resilience”
3Paytm to not charge any fee on wallet payments for merchants; move to benefit 1.70 crore users