Chola Finance’s margin compression could be a roadblock to its dream run, say analysts

Cholamandalam Finance’s assets under management (AUM) rose 40.12 percent on-year to Rs 1.15 lakh crore, according to the investor presentation

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Despite a 28 percent rise in consolidated net profit, Cholamandalam Investment & Finance Company’s margin compression in the April-June quarter of FY24 has brokerages worried.

The non-bank financier’s margins declined to 7.3 percent from 8 percent in the year-ago period on the back of higher borrowing costs. Cost of funds for Chola Finance went up to 6.9 percent from 5.5 percent in Q1 FY23.

At 11 am, the stock was quoting at Rs 1,114.90 on the NSE, lower by 1.4 percent from previous close. Trading volumes at 5,195,638 shares were over four-times the 20-day average volumes.

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While analysts have lauded the company’s efforts in diversifying its loan book, foreign broking firm CLSA has downgraded its rating on the stock from a Buy to an Outperform. This is on the back of margin compression and asset quality deterioration in stage 3 level. Stage 3 assets in non-banking finance companies (NBFC) are loans which have been overdue for more than 90 days.

“The stock is currently trading at 26 times its one-year forward price-to-earnings (PE) ratio, significantly higher than its historical average of 18 times and even the cyclical peak of 22 times,” said CLSA in its report, with a target price on Rs 1,250.

Morgan Stanley issued an equal-weight rating for the stock with target price of Rs 1,000. The firm said that NIM compression was sharper-than-expected, compared to both estimates and the company’s own guidance. The increase in slippages and credit costs, primarily driven by new business segments, further contributed to the cautious outlook.

“Given the recent surge in the stock price, there might be a cooling-off period in the near term,” it said. The stock has rallied over 50 percent in the past four months.

Jefferies, however, has maintained a more optimistic stance, issuing a Buy rating for Chola Fin with target price of Rs 1,350 per share.

It has highlighted that the board’s approval for the Rs 4,000 crore QIP (qualified institutional placement) could be 23 percent book value (BV) accretive if the equity is issued at the current market price.

Meanwhile, the company’s credit costs rose by 20 basis points year-on-year, driven by higher costs in the new business segment and assets under management (AUM) rose 40.12 percent on-year to Rs 1.15 lakh crore, according to the investor presentation.

Of the total, vehicle finance is a major component worth Rs 71,065 crore or 62 percent of the total AUM. This was followed by loan against property worth Rs 22,866 crore or 20 percent of total AUM.

The remaining share comprise of home loans and new businesses, 8 percent and 10 percent, respectively, of the total AUM.

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