We recently met the management of Cholamandalam Investment and Finance Company (CIFC) and came back reassured. In addition to the broader slowdown in the auto OEMs, the recent headwinds in the NBFC space and the consequent tight liquidity have forced most vehicle financing NBFCs to go slow on growth, but not CIFC. We feel, given CIFC’s franchise, it will be a disproportionate beneficiary of the distortion that has plagued NBFCs in the last nine months. With a diversified bouquet of products in the vehicle financing space and a much improved home equity (HE) franchise, it can use the levers to improve its NIMs while keeping the operating cost ratios stable. We expect it to contain credit costs within 80bps for FY20E resulting in a healthy RoA of 2.3% (with improvement bias). Maintain ADD with a target price of Rs 305 (from Rs 300 earlier).
There is a behavioural shift in the buying behaviour of customers. New vehicles are now typically sold in the fourth/fifth year compared with sixth year earlier. This can be partly attributed to the impending scrappage policy (in whatever form it comes — mandatory scrapping or massive hike in re-registration of old vehicles). As such, both the demand and the supply are good in the used vehicles segment. While the HCV segment has shown negative growth this year, both SCV and LCV segments continue to do well.
While the PV sector as a whole has slowed down, the car and MUV segment of CIFC continued to do relatively well. Its focus remains on low-cost vehicles like the Alto and Etios in PVs and the likes of the Bolero in MUV which can be deployed for productive as well as personal use.