The company has Rs 64 bn in cash and equivalents on its balance sheet, plus another Rs 45 bn in undrawn bank lines.
Cholamandalam Investment and Finance (CIFC) released an update on its Q4FY20 performance amid the Covid-19 challenge. Disbursements declined 23% q-o-q/ 35% y-o-y to Rs 58 bn (similar drop witnessed in VF and LAP). With Covid-19 having impacted the past 10-15 days of the quarter, disbursements should not have declined more than 10-15% y-o-y, in our opinion. The larger-than-expected decline indicates underlying weakness in CV demand despite the migration to BS-6 and lack of vehicle supply at the dealer level. As a result, AUM was flat q-o-q (up 12% y-o-y) at Rs 606 bn. The company provided an update on the expected trend in its monthly cash inflows/outflows. As per the update, disbursements are expected to hover around Rs 60 bn in H1FY21, ~40% of the run-rate. As a result, we estimate 17% decline in disbursements to Rs 243 bn in FY21.
The company has Rs 64 bn in cash and equivalents on its balance sheet, plus another Rs 45 bn in undrawn bank lines. Even with lower collections in April and May due to the loan moratorium, its on-balance sheet liquidity would suffice up to Aug ’20. Typically, CIFC receives Rs 20 bn in loan repayments every month. In April and May, it expects to collect only Rs 4 bn each. This implies 80% of customers (by value) have availed the loan moratorium. Note that the company has not availed moratoria on its borrowing commitments. While CIFC did not give any numbers or commentary on asset quality, the company stated it had contacted all its customers and noted 95% of its HCVs were at their locations. The lower-than-expected disbursements in Q4FY20 cannot be attributed to the Covid-19 impact alone, in our view. We believe they also point to structural issues, such as lack of demand in the CV segment and temporary issues such as unavailability of stock at the dealer level. Demand recovery in FY21 would be divergent, with the tractor segment being the first to recover (owing to a good rabi crop harvest and normal monsoons), followed by LCVs and cars, and lastly the M&HCV segment. The home equity segment is likely to be muted in FY21 as well. While the impact of recent events on asset quality is uncertain, we increase our FY21/FY22 credit cost estimates to 1.8%/1.3% from ~0.8%. As a result of slowing AUM growth and higher credit costs, we cut our FY21/FY22 EPS estimates by ~25%. Maintain ‘buy’ with a target price of `225 (1.7x FY22E BVPS).