Stock to buy: This mid-cap financial stock receives a call to buy for potential gains of 19%


Stock market outlook

Cholamandalam Investment stock is currently trading at Rs 624.55/share, open at Rs 624.90/share. The previous close was 620.20/share. The stock’s 52-week low and high are Rs469.25/share and Rs768/share respectively. At the start of the 22-23 fiscal year, the stock hit the 52-week high.

The stock’s ROE is 18.29%. The TTM EPS is Rs 26.23. The PE ratio is 23.78. The PB ratio is 4.33. Its nominal value is Rs 2. Cholamandalam Investment & Finance is a mid-cap stock with a market capitalization of Rs 51,610 crore.

As of July 13, 2022, the company’s shares had fallen 20.44% in the past year and 171.66% in the past 5 years, respectively. Over the past week, it has given negative returns of 2.46% and a positive return of 3.12% over the past month, respectively.

ICICI Securities has estimated a target price of Rs 743/share, given this, if an investor buys the stock at the current market price, the stock can jump 19% in 12 months.

Financial year 2022

Financial year 2022

FY22 was a year of ‘expanding horizons’ for Chola. Chola has expanded beyond traditional segments and explored new horizons to meet changing customer needs. It launched two new businesses, a consumer and small business loan (CSEL) and a secured business and personal loan (SBPL). It acquired Payswiff Technologies and also invested in Paytail Commerce to participate in the fintech space. With a focus on end-to-end digitization, Chola continues to push digital transformation to the forefront.

The strategy has merit given that the overall growth of the non-vehicle segment has been much higher than that of vehicles. Although actual growth in FY22 or estimated growth in FY23/24 is strong for the vehicle segment, the meager CAGR of 14% between FY18-22 and the inherent cyclical nature vehicle financing justify the need for diversification. This is exemplified by the fact that growth in other segments was better for Chola, as AUM LAP/housing loan increased 14%/52% CAGR during FY18 to FY22, respectively.

New initiatives

New initiatives

New initiatives aim to provide a complete ecosystem for consumers and small businesses still beyond the reach of formal credit. The CSEL segment will offer unsecured loans to salaried/self-employed professionals and micro and small businesses through term and flexible loans. The SBPL segment will offer secured loans based on credit assessment and cash flow projections and will target new credit customers primarily in Tier II/III cities. The SME segment will meet the working capital and investment needs of SMEs. All of these segments (except SBPL) will operate through a combination of traditional and new age fintech partnerships. The acquisition of Payswiff Technologies (PAYSWIFF) completes the same as it is engaged in offering online payment gateway services for e-commerce businesses and provides e-commerce solutions.

Well-distributed branch presence. 1,145 Chola branches are geographically well-diversified, with 28%/22%/23%/26% of branches in the south/north/west/east regions respectively. Out of 1,145 branches, 1,093 belong to vehicle financing (VF), 388 (380 co-located with VF) to LAP and 217 (177 co-located with VF) to mortgage loans. Disbursements/NIM/PAT per branch increased at a CAGR of 2%/11%/15%, respectively, from FY18-FY22 to Rs310mn/Rs51mn/Rs19mn from FY22.

Analytics functions established key solutions in FY22

Analytics functions established key solutions in FY22

The analytics functions established key solutions in FY22 to meet the increased need for new segments.

  1. Acquisition dashboard templates built and implemented across lines of business to automate the decision mechanism with consistent and improved customer selection. This should help the company segment candidates based on risk and enable a faster onboarding journey for low-risk segments.
  2. Early warning models designed and developed as part of an enhanced collection strategy, enabling segmented processing that helps map the right collection effort with a given customer group.

Other digital initiatives to improve operational efficiency

  1. Growing use of in-house automation scripts, robotic process automation tools, and cognitive automation solutions.
  2. A scalable big data repository is being created to meet data management, data access, and analytics needs.
  3. Upgrade systems with a host of integrations
  4. Introduction of GST and analysis of bank statements as well as a dedicated application for customers.
  5. Online collection payment methods have been introduced for customers.
  6. Online portals have been introduced to liaise and share documents with suppliers.
  7. Employees received tabbed mobile devices.
  8. Digital tools/applications have been introduced to minimize physical presence in branches.
NIM - effect on the fixed side, increase in the cost of funds and new segments

NIM – effect on the fixed side, increase in the cost of funds and new segments

50% of Chola’s borrowings are fixed in nature and 20% are linked to the MCLR, with only 30% of the borrowings linked to an external benchmark. Therefore, it can be concluded that the impact of rising rates could occur at a slower pace for Chola. On the asset side, VF contributes 69% to the AUM and is fixed in nature; however, 1/3 of the AUM decreases every year, which gives the possibility of lending new loans at a higher rate against relatively longer loans. Almost 29% of assets under management are LAPs/home loans which are floating interest in nature, therefore the impact of rising rates will be lower for NIMs of these companies. With the expansion of new businesses offering potentially higher returns, Chola NIMs may remain stable or slightly higher despite rising interest rates.

Gaadi Bazaar

Gaadi Bazaar (an initiative of Chola) is an online platform for buyers, transporters, drivers, brokers/dealers and others to buy or sell automobiles. It facilitates direct interaction between buyers and sellers as well as end-to-end financial assistance enabling a smooth sale at a fair market price. Users have easy access to buyer/seller information. All subsequent transactions are decided and carried out between the buyer and the seller without the intervention of the platform. It has over 1 million downloads on Android Play Store with 4.1 rating and 18,000 reviews.

    The brokerage suggests buying for a target price of Rs 743/share

The brokerage suggests buying for a target price of Rs 743/share

While diversification is a common business strategy for vehicle financiers, Chola is perhaps outperforming its peers by showcasing more concerted efforts and results like (1) already significant progress (12% of total disbursements in Q4FY22) in new segments, (2) add-on acquisitions like Payswiff and (3) focus on developing complementary organic skills through analytics tailored to new segments such as acquisition dashboard, business models early warning and also hiring required. The company emphasizes “ambitious growth plans for FY23”. Successful execution of these strategies will cement the high multiples (3.5x 1-year forward P/B vs. 1.5x average for other major listed vehicle financiers) enjoyed by the company. The combination of a bullish CV cycle and a well-written new segment strategy offers favorable earnings for FY23. Risks include high inflation leading to weak demand and less than optimal results in new segments.


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