Fundamental Analysis Of Cholamandalam Investment & Finance Company – Future Plans

Fundamental Analysis Of Cholamandalam Investment & Finance Company: The Murugappa Group is one of India’s leading business conglomerates. Hailing from South India, the group holds leadership position across Auto Components, Abrasives, Ceramics, power Systems and other major industries. Today we will look at an important Financial Institution from the prestigious house of Murugappa Group.

Let us learn more about the Company, its operations, lending segments. We will also understand the amount of assets it manages and use industry specific ratios to better analyse the Company.

Fundamental Analysis Of Cholamandalam Investment & Finance Company – Company Overview

Established in 1978, Cholamandalam Investment and Finance Company Limited (also known as Chola) is the financial services & lending arm of the Murugappa Group. Chola initially commenced business as an equipment financing company which has now transformed into a comprehensive financial service provider. 

The NBFC operates out of 1191 branches across India with Rs. 1.12 Lakh Cr worth of Assets under Management (AUM). It offers vehicle finance, home loans, loans against property, SME loans, secured business personal loans (SBPL), consumer & small enterprises loans (CSEL), and a variety of other financial services to customers.

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Apart from the lending businesses, the Company also runs a used vehicle marketplace, specialized for commercial vehicles, called Gaadi Baazar. The platform has 7000+ sellers, 9000+ bidders, and over 6 lakh listings on its platform. The platform is also optimized to cross-sell vehicle loans to individuals looking to purchase vehicles.

Chola also operates a subsidiary Cholamandalam Securities Limited (CSEC) a leading stock broker, with over 20 years of Operational Experience. The Company offers Stock broking and other DP Services. Other products distributed on the platform include Mutual Funds, Bonds & Debentures, Fixed Deposits, Insurance, PMS, and Initial Public Offering. 

Business Segments

  1. Vehicle Financing: With over 3 decades in the business it is the largest segment of the Company managing assets worth Rs. 66,938 Cr or 63% of the NBFC’s total Assets. It has a very diversified portfolio of vehicle loans with 27% of the loans being disbursed to used vehicles followed by light commercial Vehicles. 21%
  2. Loan Against Property: In the LAP market, Chola is currently managing over Rs. 21,588 Cr worth of Assets. 97% of the LAP customers are self-employed Non-Professionals. Chola issues both Business loans as well as Micro Loans under the segment.
  3. Home Loans: The Home Loan segment is the 3rd largest segment with Rs. 8451 Cr worth of assets under management. It is also the fastest-growing segment which doubled its disbursements since FY22. The target group for these loans remains the lower middle class, which comprises small-scale business owners.
  4. Other Loans: Consumer & Small Enterprise Loans are focused on offering direct-to-consumer loans. These are issued via Chola’s Fintech app or via partnerships with other Fintechs. Some other loans include Secured Business & Personal Loans and MSME Loans.

Industry Overview

The Indian economy is staging a broad-based recovery across sectors, from pandemic-induced contraction to international geo-political conflict and inflation, and is well-positioned to ascend to the pre-pandemic growth path. 

Inflation averaged around 6.8% between April – January FY23, as compared to just 5.3% in the same period last year. To keep inflationary pressures under control RBI has raised the repo to 6.5%. The interest rate will remain on the higher end for as long as inflation comes under RBI’s control of under 4%.

Commercial vehicles, passenger vehicles, and two-wheelers registered double-digit growth in FY 23 due to improvements in economic activity, revival of construction/mining activities, and improvement in semiconductor supplies. 

The commercial vehicle industry is expected to deliver double-digit growth in FY 24 driven by freight demand, replacement demand, structural economic recovery, and higher spending by the Government. However, the increase in fuel prices and its impact on the viability of fleet operators will remain a key challenge in FY 24.

The loan Against Property industry portfolio stands at Rs.  8 Lakh Cr as per CIBIL’s September 2022 report.  In FY23, Banks registered strong growth due to lower cost of funds & adequate liquidity support. CRISIL expects the segment to grow by 9-11% in FY24 driven by improved economic conditions assisting in normalization of business activities.

Indian Housing Finance market is estimated to be about Rs. 26 Lakh Cr with credit growth in banks outpacing that of HFCs/NBFCs. Analysts expect the housing sector to grow 11 – 16% in FY 24 and affordable housing to grow by 18-22% in the same period. In terms of asset quality, GNPA is expected to further reduce in FY 24, supported by controlled fresh slippages. 

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Fundamental Analysis Of Cholamandalam Investment & Finance Company – Financials

Net Interest Income & Net Profit

In the year FY23, Cholamandalam earned a Net Interest Income of Rs. 7229 Cr, which increased by 24% from Rs. 5840 Cr in FY22. NIM growth has grown consistently at the rate of 20% CAGR since FY21, with the higher growth being recorded this year.

Total Income for the year increased by 28%, on the back of increased interest Income. Total revenue increased from Rs. 10,231 Cr in FY22 to Rs. 13,105 Cr in FY23. Growth of total revenue has been rather slow at 16.6% as compared to 20% of Net Interest Income.

Net Profits have also increased by 24%, from Rs. 2158 Cr in FY22 to Rs. 2677 Cr in FY23. Profits have been on a higher growth rate as a result of increasing Net Interest Margins. Since FY21 Cholamandalam has grown at the rate of 22% CAGR.

Disbursements & Assets Under Management (AUM)

The rise in interest income is in line with the steady growth in disbursements. FY23 saw a 87% jump in disbursements from Rs. 35,490 Cr in FY22 to Rs. 66,532 Cr in FY23. Since FY19, loan disbursements have increased at the rate of 21.6% CAGR, with a majority of the growth from the vehicle loan & house loans segment.

The Assets Managed by the NBFC increased by 36% in a year to cross the 1 Lakh Cr mark. The AUM increased from Rs. 82,904 Cr in FY22 to Rs. 1.12 Lakh Cr in FY23. However, since FY19 Asset growth has only increased by 18% CAGR, as compared to disbursement growth of ~22%.

Profit Margins

Being an NBFC Cholamandalam is able to lend to much riskier borrowers or take loans charging a high interest premium. Due to this, the Company has always maintained Net Interest Margins above 7% (Excluding FY20), with an average of 7.36% since the past 5 years. (Excluding FY20). 

 Net Profit Margins of the NBFC were at 15.78% in FY23, which increased by 368 bps as compared to 12.10% in FY22. The average profit margins in the past 5 years have stayed at around 15.55%.

Non-Performing Assets (NPAs)

NPAs are those loans against which interest or principal payments have not been made for three consecutive months. Cholamandalam’s Gross NPAs have consistently been on the rise since its lowest at 2.7% in FY19, currently around 4.6% in FY23.

Every Bank or NBFC is required to create provisions (out of its Profits) against these NPAs. The assets against which provisions have not been created fall under Net NPA category. These Net NPAs have also been on a steady rise from just 1.7% in FY19 to spiking to their highest of 4.8% in FY22. Currently Net NPAs are at 3.1% slightly higher than 5-year average of 2.80%.

Fundamental Analysis Of Cholamandalam Investment & Finance Company – Key Metrics

The Key Metrics of Cholamandalam Investment & Finance Company are given below.

Fundamental Analysis Of Cholamandalam Investment & Finance Company – Future Plans

  1. In the Vehicle Financing division, the Company would continue to foray into the top of the pyramid customer segment through the co-lending route which will help the company to increase market share and also retain existing customers.
  2. In the Loan Against Property division, the NBFC will focus to achieve a loan mix comprising of 80% of the portfolio of residential properties with an average ticket size of less than Rs. 50 lakhs.
  3. In the SME Loans category, the NBFC will roll out loans of the average ticket size of Rs. 1.5 Cr with an average Loan to Value ratio of 60%-65% of the underlying assets.
  4. In the secured Business & Personal Loan category, Chola has maintained an average ticket size of Rs. 4.42 Lakhs with an average tenure of 69 months. The Company has a strong presence in Tier II – Tier V towns and has recently ventured into Haryana & Bihar last year.

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Cholamandalam Investment & Finance Company (Chola), has established itself as a major player in the Indian NBFC sector. With over four decades of experience and a diversified portfolio spanning vehicle financing, loan against property, home loans, and small enterprise loans, Chola has built a robust presence across the country, managing an impressive asset base of Rs. 1.12 lakh crore.

Chola’s financial performance has been remarkable, with consistent growth in net interest income, total revenue, and net profits. The company’s ability to maintain healthy net interest margins and profit margins, even while catering to riskier borrowers, speaks volumes about its prudent risk management practices and operational efficiency.

However, the rising trend of non-performing assets (NPAs) is a concern that needs to be addressed. Chola’s focus on expanding its customer base, increasing market share, and retaining existing customers through co-lending arrangements and tailored product offerings across various segments is a strategic move that could help mitigate this risk.

With the Indian economy poised for robust growth and favorable industry dynamics in sectors like commercial vehicles, housing, and small and medium enterprises, Chola is well-positioned to capitalize on emerging opportunities. Its diversified portfolio, extensive branch network, and innovative digital initiatives like the Gaadi Baazar marketplace and Fintech app position it as a formidable player in the financial services landscape.

Overall, Cholamandalam Investment & Finance Company’s strong fundamentals, growth-oriented strategies, and commitment to customer-centric solutions make it a promising investment opportunity, provided it can effectively manage its asset quality and navigate the challenges posed by the dynamic economic environment.

Written by Nasir Hussain

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