initiating coverage 7 oct 2015 cholamandalam investment...

INITIATING COVERAGE 7 OCT 2015

Cholamandalam Investment & Finance BUY

Quality, at a price Over FY11-15, the Chennai-based Murugappa group’s Cholamandalam Investment (CIFC) diligently built national reach, scale and process quality in its CV finance and home equity (LAP) business. Notably, CIFC improved costs even as macros and asset quality slipped. As India readies for a saucer-shaped macro recovery, we see a sweet spot emerging with scale and spread benefits for CIFC. Valuations, though, are not cheap at 2.84x FY17E ABV. This is a well deserved premium since (1) CIFC’s portfolio combines a cyclical vehicle finance book with a relatively secular home equity book, (2) NIM improvement is likely as interest rates soften, and (3) scale efficiencies will kick in with growth. These will be led by revival of the CV cycle, falling interest rates, cheaper fuel and improving macros.

CIFC has already shifted to 150DPD NPA recognition, thereby capping near-term pressure on reported asset quality. The move towards 90DPD recognition will push up headline NPAs, but gradual macro healing and the rising proportion of home equity can act as buffers. RoAAs are set to rise to ~2.24% by FY18E (1.92% in FY15). Initiate with BUY. Our TP is Rs 728 (3x 1-yr fwd ABV of Rs 243).

Niche and diversified play: CIFC offers a useful combination of cyclicality (vehicle finance, 68% of AUM) and secular growth (LAP book). Within vehicle finance, CIFC is diversified across segments and geographies. It targets small road transport operators (SRTOs). With a significantly expanded branch network

(530+ vs. 375 in FY12), improved productivity, gradual macro recovery and a well-capitalised B/S, we expect CIFC to report 17% AUM CAGR over FY15-18E.

Continuous efficiency gains: CIFC has cut C-I (down ~1,280bps over FY12-15) and C-AA (down ~70bps), but lags peers. It has rolled out technology-based process initiatives for higher sales productivity and approvals. Forty gold loan branches have been shut down in FY15; an annual savings of Rs 100mn+ can accrue. We expect C/AA to gradually improve by ~15bps to 3.2%.

Shift to 150DPD eases asset quality concerns: The shift to 150DPD rules out near-term asset quality spikes. With slower economic activity (lower freight availability and rates) and higher diesel prices, CIFC’s GNPA (3.3%) increased ~4.3x led by the vehicle financing segment (3.8% GNPA in June-15) over FY13-1QFY16. CIFC consciously slowed book growth during this period and focused on collections and faster resolution in ‘early buckets’. The gradual shift to 90DPD can optically worsen asset quality. We have factored GNPAs of 3.7-4.2% over FY16-18E.

Financial Summary YE March (Rs mn) FY14 FY15 FY16E FY17E FY18E Net Interest Income 11,286 13,762 15,902 18,469 21,511 PPOP 8,336 9,818 11,503 13,621 16,057 PAT 3,640 4,350 5,258 6,576 7,840 EPS (Rs) 25.4 30.3 33.7 42.1 50.2 EPS growth (%) 18.7 19.1 11.4 25.1 19.2 ROAE (%) 17.1 17.5 16.7 16.9 17.5 ROAA (%) 1.83 1.92 2.06 2.23 2.24 Adj. BVPS (Rs) 148.0 162.9 194.3 225.4 259.6

P/ABV (x) 4.33 3.93 3.30 2.84 2.47 P/E (x) 25.2 21.2 19.0 15.2 12.8 Source: Company, HDFC sec Inst Research

INDUSTRY NBFCs

CMP (as on 6 Oct 2015) Rs 641

Target Price Rs 728 Nifty 8,153

Sensex 26,933

KEY STOCK DATA

Bloomberg CIFC IN

No. of Shares (mn) 156

MCap (Rs bn) / ($ mn) 100 / 1,530

6m avg traded value (Rs mn) 32

STOCK PERFORMANCE (%)

52 Week high / low Rs 744 / 433

3M 6M 12M

Absolute (%) (7.2) 7.5 33.6

Relative (%) (2.7) 13.0 32.2

SHAREHOLDING PATTERN (%)

Promoters 53.16

FIs and Local MFs 24.74

FIIs 15.57

Public and Others 6.53

Source : BSE

Darpin Shah [email protected] +91-22-6171-7328

Siji Philip [email protected] +91-22-6171-7324

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

CHOLAMANDALAM INVESTMENT : INITIATING COVERAGE

CONTENTS CIFC : Cyclical + Secular + Granular ................................................................................................................................... 3

Vehicle finance: coming off a cyclical low ......................................................................................................................... 3

Home Equity: steady business growth engine ................................................................................................................... 6

CIFC’S FUTURE: Recovery + Growth + Quality ................................................................................................................ … 8

Borrowing profile skewed towards Banks .......................................................................................................................... 9

NIM improvement is imminent .......................................................................................................................................... 9

Costs high, but topping out .............................................................................................................................................. 10

Asset quality: Shift to 150DPD caps near-term concerns ................................................................................................ 12

Return ratios to improve .................................................................................................................................................. 13

VALUATION ................................................................................................................................................................... 13

PEER COMPARISION ...................................................................................................................................................... 15

1QFY16 RESULTS HIGHLIGHTS .................................................................................................................................................... 17

Five quarters at a glance................................................................................................................................................... 18

FINANCIALS ................................................................................................................................................................... 19

ANNEXURE

Quarterly charts…………………………………………………………………………………………………………………………………………………………..21

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CIFC: CYCLICAL + SECULAR + GRANULAR CIFC offers a niche play on the cyclical vehicle financing business (68% of portfolio, 78% of revenues, 75% of PBT) and a relatively secular play on home equities or LAP (~30% of portfolio). Both businesses are characterised by a granular book that is geographically well dispersed.

VEHICLE FINANCE: COMING OFF A CYCLICAL LOW CIFC has a diversified up-country vehicle finance

business spread across geographies (~90% of its 530+ branches are in Tier II and IV towns) and segments (LCV, MHCV and used CVs). CIFC has strategically positioned itself in the middle to lower end of the opportunity pyramid by targeting SRTOs for new vehicles, first-time users and small ticket operators (for used vehicles).

Source : Company, HDFC sec Inst Research

The book is skewed towards LCV and used CV (~54%). Micro and agri-based customers account for two-thirds of disbursements. This part of the book is facing cyclical headwinds with deterioration in asset quality and coverage, even as CIFC has expanded reach, added costs and invested in technology/processes.

In line with the overall slowdown witnessed in macros and CV volumes, CIFC’s disbursements grew moderately at 9% CAGR over FY12-15 (with a decline of ~8% in FY15) and tilted away from HCVs (-5% CAGR) and LCVs (-7% CAGR).

Vehicle Finance Disbursements Break-up (Rs bn) FY12 FY13 FY14 FY15 CAGR (%)

LCV 25.0 30.8 26.5 20.3 -7%

Used CV 20.3 31.8 33.1 31.1 15%

HCV 11.6 10.9 8.6 9.9 -5%

Tractors 2.0 6.7 10.4 9.6 69%

Car & 3W 15.2 19.5 22.7 22.7 14%

Source: Company, HDFC sec Inst Research

MHCV sales volumes in India have already reported a notable rebound in FY15 (up 21%) and are expected to continue. In the LCV segment, while the volume decline has moderated (down 12%), a reversal to positive growth is a while away. With a macro recovery, we believe CV volumes can rebound enough for CIFC to claw out of its sluggish phase.

Industry Trend (‘000) FY12 FY13 FY14 FY15 FY16E FY17E

M & HCV 299 222 162 196 239 285

YoY growth (%) 9 (26) (27) 21 22 19

LCV 410 477 389 344 365 412

YoY growth (%) 30 16 (18) (12) 6 13


Principal

Operator > 50 Vehicles

Large Operator

26-50 Vehicles HCV

Medium Operators 10-25 HCV & LCV Vehicles

SRTOs - HCV & LCV

First Time Users & Small Ticket Operators , older vehicles - HCV, LCV, MUV, Cars & SCV

CV Industry

Chola

~65% of disbursementsare to micro & small entreprises and agri based customer segment

Vehicle Finance - Business Model & Postioning

Chola positioning *Middle of thepyramid -New, Used CVs & MUVs*Top of Bottom of Pyramid - SCV & older CVs Shubh

Vehicle finance segment forms ~68% of portfolio and 78% of revenues CIFC largely operates in Tier II and IV towns with presence across geographies and segments CIFC has positioned itself in the middle to lower end of the pyramid with focus on SRTOs Vehicle finance disbursements have grown at a mere 9% CAGR led by decline in L&HCVs segments

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Vehicle Finance Disbursements: Poised For Pickup


Presence across geographies, along with a well-diversified portfolio, puts CIFC in a better place to deliver FY15-18E AUM CAGR of ~14.4%. By FY18, we expect CIFC’s vehicle finance portfolio to grow to Rs 264bn, ~65% of AUM.

Vehicle Finance AUMs: Recent history Rs bn FY12 FY13 FY14 FY15 CAGR (%)

LCV 32.5 48.9 49.5 45.9 12%

Used CV 28.5 38.8 49.5 49.4 20%

HCV 14.8 20.1 20.5 22.9 16%

Tractors 3.9 8.6 15.4 17.6 65%

Car & 3W 20.4 29.3 35.8 40.6 26% Source: Company, HDFC sec Inst Research

Vehicle Finance AUM: Growth To Rebound


Product-wise AUM (June-15)


Within the vehicle finance portfolio tractor segment has grown at 65% CAGR, while the HCV & LCV reported slower growth of 16% & 12% respectively We have factored Vehicle Finance disbursements at 19% CAGR over FY15-18E Vehicle Finance AUM to grow at 14% CAGR over FY15-18E and reach Rs 264bn LCVs and used CVs form ~54% of the vehicle financing portfolio; tractor portfolio stood at 10% vs. a mere 4% in FY12

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LCV, 26.0%

Used CV , 28.0%HCV, 13.0%

Tractors, 10.0%

Car & 3 wheelers,

23.0%

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Vehicle Finance Portfolio vs. Peers


State-wise AUM: Well Diversified


Over the past four years, CIFC’s pre-tax RoAA in the vehicle finance segment has halved to 2% (FY15) with a sharp fall in NIMs (down ~140bps) and 120bps rise in loan loss provisions. The sharp decline in NIM can be attributed to a fixed rate book in a rising interest rate scenario, coupled with increasing delinquencies.

Vehicle Finance: Provisions And NIMs Drag Pre-tax RoAA

FY10 FY11 FY12 FY13 FY14 FY15

Income (Rs bn) 5.80 8.82 13.34 20.19 25.96 29.10 PBT (Rs bn) 0.74 1.87 2.39 3.51 3.23 3.46 NIM 7.9% 8.9% 7.7% 7.3% 7.1% 7.5% Exp Ratio 4.4% 4.3% 4.1% 3.8% 3.5% 3.6% Provisions 1.3% 0.8% 0.5% 0.5% 1.6% 2.0% Pre-tax ROAA 2.2% 3.9% 3.1% 3.0% 2.1% 2.0% Source: Company, HDFC sec Inst Research

With rapid branch expansion and slowdown in the momentum of disbursements, the expense ratio declined by a mere 70bps. Sharp rise in recovery cost (35% CAGR over FY12-15) and high investments in IT and networking (31% CAGR over FY12-15) have contributed to the modest decline in expense ratio for the vehicle finance segment.

TN, 9% AP (incl. Telangana),

7%

Mah, 12%

Chattisgarh, 8%

Raj, 10%

Guj, 6%Punjab, 6%

Kerala, 4%

MP, 7%

WB, 5%

Delhi, 3%

UP, 5%

Orissa, 4%

KTK, 5%

Haryana, 3%

Other states, 7%

Over FY11-15, CIFC’s vehicle finance portfolio has grown at 31% CAGR vs. 13-25% CAGR by peers considering its smaller base Vehicle finance portfolio remains well diversified across regions CIFC’s vehicle finance pre-tax RoAA has halved over FY11-15 led by higher sharp rise in provisions and NIM compression Focus towards collections and improving technology has led to a mere 70bps drop in expense ratio

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CIFC IIB SHTF MMFS

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HOME EQUITY: STEADY GROWTH ENGINE To provide cushion and stability to loan growth and

earnings, CIFC diversified into the home equity (LAP) business in FY07. CIFC offers this product through 80 branches (from sub 40 branches in FY11) and focuses on self-employed non-professional individuals in the middle socio-economic class with self-occupied residential properties. CIFC provides LAP (loans against property) at ~13-15% (floating rate) with LTVs in the range of 60-65%, tenure of 5-7 years and average ticket size of ~Rs 5mn, with predominant focus on self-occupied residential properties (89% of AUM).

Over FY12-15, the home equity portfolio has grown at 33% CAGR, driven by disbursement CAGR of 26%. With slowdown in the vehicle finance segment, the home equity proportion in CIFC’s loan mix increased to 30% (from 23% in FY12). By FY15, the LAP portfolio contributed ~25% of the total income and 36% of PBT.

CIFC’s large branch network, under-penetrated MSMEs and weak capital position at PSBs lead us to believe that CIFC’s home equity loan book can grow at a CAGR of 22% over FY15-FY18E.

Break-up Of Home Equity Portfolio (June-15)


Home Equity Disbursements To Remain Steady


Home Equity AUM: Steady Growth To Continue


Self occupied

Resi Property

89%

Commercial 5%

Others 6%

CIFC offers home equity portfolio through 80 branches and focuses on self-employed non-professional individuals in the middle socio-economic class with self-occupied residential properties (89%) Over FY12-15, home equity disbursements grew at 26% CAGR Disbursements in home equity are expected to grow 22% CAGR over FY15-18E Over FY12-15, the home equity portfolio grew at 33% CAGR to form ~30% of total AUM We expect home equity AUM to grow at 22% CAGR over FY15-18E to form ~32.5% of total AUM

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While the vehicle financing portfolio saw a sharp decline in its pre-tax RoAA over FY11-15, the home equity portfolio provided enough cushion with an improving stable pre-tax RoAA in the range of 2.9-3.6%. This can be attributed to relatively stable asset quality, along with continued decline in expense ratios, despite some drop in NIMs. Expense ratios in the home equity business have gradually gone down to 1.3% from 2.4% in FY11, led by relatively higher growth in AUMs, albeit on a smaller base. During FY15, home equity GNPAs jumped ~1.5x, thus leading to rise in provisions.

Home Equity: Pre-tax RoAA Continues To Improve

FY10 FY11 FY12 FY13 FY14 FY15

Income (Rs bn) 1.69 2.59 3.78 5.51 7.58 9.41 PBT (Rs bn) 0.35 0.52 0.81 1.21 1.91 2.40 NIM 6.6% 5.8% 5.4% 5.6% 5.6% 5.4% Exp Ratio 2.9% 2.4% 2.0% 2.0% 1.6% 1.3% Provisions 0.4% 0.5% 0.3% 0.3% 0.2% 0.5% Pre-tax RoAA 3.3% 2.9% 3.1% 3.3% 3.8% 3.7% Source: Company, HDFC sec Inst Research

Page | 7


CIFC’s FUTURE: RECOVERY + GROWTH + QUALITY With strong presence across geographies, segments

and a widespread network, we expect CIFC to deliver 17% CAGR (vs. <10% in FY15) in AUM to Rs 407bn over FY15-18E. The robust growth will be driven by 14.4% CAGR in the vehicle finance business and continued steady momentum in the home equity business (22% CAGR). To push growth, CIFC recently ventured into new segments — home loans, MSME business loans and gold loans (2% of total AUM). It will soon roll out credit products in construction equipment and two-wheelers.

Disbursements Momentum To Improve


Home Equity Disbursements On The Rise


Total AUM: Faster Growth In Home Equity


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Over FY15-18E, we expect AUM growth of 17% CAGR driven by home equity portfolio Vehicle finance portfolio to form ~65% by FY18, while home equity share will inch up to ~32.5%

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AUM Break-up: Tilt Towards Home Equity To Continue


BORROWING PROFILE SKEWED TOWARDS BANKS On the liability side, CIFC's borrowings are skewed

towards bank borrowings (~49% of total), which are largely on floating basis. The shift towards debentures (25% vs. ~16% in 1QFY15) over the past three quarters will enable the company to contain its cost of funds. Along with the change in funding profile, CIFC recently got a rating upgrade (AA-/positive to AA/stable) from CRISIL. This is expected to enable the company to further contain funding cost.

Borrowing Profile: Tilt Towards Bank Borrowings (%) FY10 FY11 FY12 FY13 FY14 FY15 1QFY16

Bank 63.1 69.4 63.2 46.4 50.7 52.4 48.9

Debentures 8.9 12.6 22.2 21.1 19.7 20.4 25.0

CPs 18.0 7.3 2.1 5.7 3.1 2.6 4.6

Sub debt 10.0 10.7 12.5 13.0 12.1 13.4 12.7

CC/WCDL NA NA NA 13.8 14.4 11.3 8.8 Source: Company, HDFC sec Inst Research

NIM IMPROVEMENT IMMINENT Over the past few years (rising interest rate scenario),

CIFC’s yields have improved because of (1) gradual rise in the floating rate (relatively low-yielding) in the home equity portfolio (30% of AUM vs. 23% in FY12), and (2) stable yields in the vehicle finance book given the rising proportion of high-yielding segments, i.e., tractors and used CVs, despite rising delinquencies.

Segmental Yields And NIMS ( %) FY11 FY12 FY13 FY14 FY15 1QFY16 Yields

Vehicle Finance 17.8 16.8 16.7 16.5 16.8 17.0 Home Equity 14.3 14.4 14.8 14.9 14.3 14.0 NIMs

Vehicle Finance 8.9 7.7 7.3 7.1 7.5 8.1 Home Equity 5.8 5.4 5.6 5.6 5.4 5.1 Source: Company, HDFC sec Inst Research

As interest rates decline, CIFC stands to benefit because of (1) higher proportion of fixed rate book, (2) relatively higher growth in high-yielding fixed rate vehicle finance book, (3) better collections and recoveries, and (4) decline in CoF because of higher proportion of bank borrowings. However, with some compression expected in the home equity portfolio (being floating in nature) and rising delinquencies, led by shift to 90DPD, we have conservatively factored NIM improvement of a mere 10bps over FY15-18E.

Bank borrowings stood at ~49% and shift to NCDs will provide cushion to contain CoFs NIMs in home equity portfolio have remained stable due to floating rate book Despite expected decline in CoF and higher proportion of fixed rate vehicle finance book, we have conservatively factored a mere 10bps NIM improvement

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Yield And Cost Movement

Source: Company, HDFC sec Inst Research Asset Liability (June-15)

Rs bn Outflows Inflows Mismatch Cum.

Mismatch 1–14 Days 5.5 10.2 4.7 4.7 15-30 Days 1.3 4.3 3.0 7.7 Over 1-2 Months 12.0 10.3 (1.7) 6.0 Over 2-3 Months 7.7 7.6 (0.1) 5.9 Over 3-6 Months 15.1 15.9 0.8 6.7 Over 6-12 Months 43.6 47.9 4.3 11.0 Over 1-3 Years 99.7 102.7 3.1 14.1 Over 3-5 Years 11.3 17.2 5.9 20.0 Over 5 Years 52.9 32.9 (20.0) 0.0 Total 249.1 249.1


COSTS HIGH, BUT TOPPING OUT Since FY11, CIFC has added ~300 branches and

increased its work force by ~2.4x. It further invested in technology upgrade, leading to CAGR increase of ~31% over FY12-15 in IT expenses (albeit on a lower base), while expenses related to recoveries went up by ~35% CAGR vs. 20% CAGR in overall expenses.

While the productivity (disbursements/branch) during FY11-13 gradually improved, it deteriorated over FY13-15 because of unfavourable market environment. In FY15, CIFC opted to close down 40 gold loan branches. This restricted opex increase to a mere 14% despite incremental higher proportion spent towards recoveries.

Focus Towards Technology And Collections Rs mn FY12 FY13 FY14 FY15

IT Expenses 62 95 106 141

Growth (%) 13.01 52.78 11.42 32.75

% of total expenses 1.43 1.68 1.62 1.89

Recovery Exp 575 650 828 1,430

Growth (%)

12.91 27.40 72.81

% of total expenses 13.17 11.41 12.58 19.10 Source: Company, HDFC sec Inst Research

Branch Additions Remained Strong Till FY14


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Widespread Network (June-2015)


Major Presence In Rural Areas

Source : Company, HDFC sec Inst Research With improving efficiencies, CIFC’s cost ratios have

improved over the past few years — C-I ratio is down to 43% (from ~53% in FY11) and C-AA is down to 3.3% (vs. 4.03% in FY11). Despite the improvement, CIFC’s cost ratios remain elevated vs. peers

Cost Efficiency vs. Peers: Scope For Improvement

FY11 FY12 FY13 FY14 FY15

C-AA (%)

CIFC 4.03 3.78 3.60 3.31 3.30 SHTF 3.08 2.79 2.55 1.98 1.83 MMFS 4.25 3.67 3.37 3.20 3.02 C-I Ratio (%)

CIFC 52.71 56.11 49.76 44.12 43.27 SHTF 22.17 21.41 20.65 24.14 23.80 MMFS 37.44 35.36 32.60 33.04 32.61 Source: Company, HDFC sec Inst Research

With relatively faster AUM growth, NIM expansion, controlled opex led by significant improvement in technology and reduction in turnaround time, efficiencies are expected to improve further. Also, with expected lower opex of 13% CAGR (vs. 20% in FY12-15), we expect C-AA ratio to decline ~15bps to ~3.2% over FY15-18E and C-I ratio to improve ~250bps to 40.7%.

Disbursements Growth > Opex Growth, Again!


Rural, 71%

Semi Urban, 19%

Urban, 10%

Widespread network with major presence in rural segment Recovery and process/technology related cost have grown at a faster higher rate vs. overall opex growth In FY15, CIFC closed 40 gold loan branches

Andhra Pradesh 47

Tamil Nadu 47

Maharashtra 54

Rajasthan 48

Karnataka 27

Gujarat 40MP 45

UP 32

Punjab 26

Kerala 24

Others 144

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Gradual Improvement In Efficiency


ASSET QUALITY: OPTICAL ELEVATION

Stress in loan book is evident given ~2/3rd of CIFC’s book is directly linked to the macros. Between FY13 and 1QFY16, CIFCs GNPA increased (incl. shift to 150DPD) ~4x to Rs 8.7bn (3.3%). This was led by the CV segment that rose +6.3x to Rs 6.8bn (3.8%). Further, GNPAs in the home equity segment, too, increased by 5x to Rs 1.8bn (2%).

The shift to 150DPD has capped near-term concerns on asset quality. With slower economic activity (lower freight availability and rates) and higher diesel prices, CIFC’s GNPA (3.3%) increased ~4.3x led by the vehicle financing segment over FY13-1QFY16. The management consciously slowed down book growth during this period and focused on collections and faster resolution in ‘early buckets’. Further, with gradual macro improvement, better paying capability of borrowers, rising proportion of less risky home equity segment and diversified portfolio across regions/segments, we see lower asset quality risk.

Segmental NPAs: Rise In Vehicle Finance Segment


However, the gradual shift to 90DPD (by FY18) will optically push up NPA. We factor elevated GNPAs of ~3.7/4.0/4.2% for FY16/17/18E%. Further, with lower coverage ratio of ~37% (1QFY16) and expected optical deterioration in asset quality, we believe the provisions cost will continue to remain elevated. We have factored credit cost at average 1.15% over FY15-18E vs. 1.3% in FY15.

Asset Quality: Will Look Optically Elevated


Asset quality deterioration was in line with expectations since ~2/3rd of CIFC’s book is directly linked to the macros Over FY13 -1QFY16, GNPA increased (incl. shift to 150DPD) ~4x to Rs 8.7bn (3.3%) CV segment GNPAs rose +6.3x to Rs 6.8bn (3.8%) and home equity GNPAs increased by 5x to Rs 1.8bn (2%) The shift to 150DPD has capped near-term concerns on asset quality Gradual shift to 90DPD (by FY18) will optically deteriorate asset quality We factor elevated GNPAs of ~3.7/4/4.2% for FY16/17/18E%

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3.7%

3.9%

40.0%42.0%44.0%46.0%48.0%50.0%52.0%54.0%56.0%58.0%

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

C-I Ratio (LHS) C-AA Ratio

-

1.0

2.0

3.0

4.0

5.0

-

2.0

4.0

6.0

8.0

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle Finance (LHS) Home Equity (LHS)Vehicle Finance (%) Home Equity (%)

Rs bn

-

1.0

2.0

3.0

4.0

5.0

-

5.0

10.0

15.0

20.0

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

GNPA (Rs mn) - LHS NNPA (Rs mn) - LHSGNPA (%) NNPA (%)LLP (%)

Page | 12


RETURN RATIOS TO IMPROVE

Over FY15-18E, with 17% CAGR in AUMs and marginal NIM improvement, we expect ~16% CAGR in core earnings. Further, controlled opex growth (13% CAGR) and declining credit cost (LLP at average 1.15% vs. 1.3% in FY15) will be the key drivers for growth in earnings (and thus RoAA improvement). We expect CIFC’s RoAA to inch up to 2.24% by FY18 vs. 1.94% in FY15.

Return Ratios : RoAA To Inch Up To 2.24%


VALUATION CIFC’s gradual return to growth in vehicle financing,

continued momentum in home equity, improving margin trajectory, relatively stable asset quality, operating leverage and higher capitalisation remain key levers for the stock. However, CIFC’s current valuations are not cheap at 2.87x FY17E ABV.

We believe CIFC deserves a durable premium given that (1) its portfolio mix intelligently combines a medium-risk vehicle finance book with the low-risk home equity segment, (2) NIM improvement is imminent, as interest rates soften, and (3) scale and reach efficiencies will kick in as growth revives. These factors will mostly be led by revival of the CV cycle, falling interest rates, cheaper fuel and improving macros. We initiate with a BUY, and a TP of Rs 728 (3x 1-year fwd ABV of Rs 243).

-

0.5

1.0

1.5

2.0

2.5

-

5.0

10.0

15.0

20.0

FY11

FY12

FY13

FY14

FY15

FY16

E

FY17

E

FY18

E

RoE (LHS) RoAA

Page | 13


PEER VALUATIONS

NBFC CMP (Rs)

Mcap (Rs bn)

Reco ABV (Rs) P/E (x) P/ABV (x) ROAE (%) ROAA (%)

FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E

CIFC 641 100 BUY 163 194 225 21.2 19.2 15.2 3.93 3.30 2.84 17.5 16.7 16.9 1.92 2.06 2.23

LICHF 480 242 BUY 150 180 212 17.5 14.0 11.9 3.19 2.67 2.27 18.1 20.4 20.3 1.43 1.52 1.51

MMFS# 238 134 NEU 86 95 108 15.6 15.5 13.0 2.67 2.42 2.12 15.5 14.0 15.1 2.49 2.26 2.41

SCUF 1,785 118 BUY 606 688 790 21.1 17.2 14.4 2.94 2.59 2.26 15.9 15.5 16.2 3.24 3.49 3.56

SHTF 956 217 BUY 390 423 484 17.5 16.2 13.5 2.45 2.26 1.98 14.1 13.7 14.5 2.41 2.22 2.40 Source : Company, HDFC sec Inst Research # adjusted for subsidiaries

PABV : Durable premium to continue

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Oct

-07

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

-1SD

+1SD

Avg.

+2SD

-2SD0

100

200

300

400

500

600

700

800O

ct-0

7

Oct

-08

Oct

-09

Oct

-10

Oct

- 11

Oct

-12

Oct

-13

Oct

-14

Oct

-15

1.5x

2.0x

2.5x

3.0x

Page | 14


PEER COMPARISON Yields Calc (%) CoF Calc (%)

NIMs Calc (%): CIFC has seen marginal improvement GNPA (%): SHTF yet to shift to 150DPD

NNPA (%) PCR (%): SHTF better placed at ~78%


12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS IIB (CFD)

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS IIB CIFC’s NIMs have remained stable led by floating rate home equity book GNPAs rise in CIFC is restricted due to its stable home equity portfolio SHTF is yet to shift to 150DPD while CIFC has already made the shift SHTF has maintained its PCR; however, with shift to150DPD, we expect its PCR to decline

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS IIB

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS IIB (VF)

0.0%

1.0%

2.0%

3.0%

4.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16CIFC SHTF MMFS

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS

Page | 15


LLP (%): SHTF’s LLP remains elevated C-AA (%): CIFC has enough scope to improve efficiency

C-I (%)


SHTF’s LLP has remained elevated as they have maintained PCR CIFC’s LLP is lower vs. peers given steady performance in home equity portfolio Slower disbursement growth and focus towards recovery, process/technology have kept elevated C-AA and C-I ratios for CIFC vs. peers

0.0%

1.0%

2.0%

3.0%

4.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS IIB (CFD)

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

CIFC SHTF MMFS

Page | 16


1QFY16 HIGHLIGHTS CIFC’s 1QFY16 core earnings (+27/8% YoY/QoQ) beat estimates with sharp improvement in NIMs (+100/38bps YoY/QoQ) and sedate growth in AUMs (+9/2% YoY/QoQ). However, higher opex (VAT-related expenses) and provisioning (LLP at 1.7% ann.) restricted PAT growth to ~18%. Despite a weak quarter, disbursements were stable sequentially, led by home equity, MHCV and LCV segments. The gradual tilt of AUMs towards the safer home equity segment continued. Asset quality was seasonally weak, with sequentially higher delinquencies in both sub-segments.

Asset quality at a probable bottom: GNPAs increased ~9/50% QoQ/YoY (Rs 8.6bn, 3.3%) led by ~22% (seasonal) QoQ rise in home equity. GNPAs in the vehicle finance segment, too, rose ~5% QoQ. With marginal rise in PCR (37%, +150bps QoQ), NNPAs jumped ~6% QoQ to Rs 5.4bn (2.08%). With the shift to 150DPD in March-15, we do not expect further near-term asset quality pressure.

Disbursements flat, improvement likely: With steady improvement in collections, the management is confident of improving disbursements. Despite seasonal weakness, disbursements were flat sequentially (vs. 13/14/12% decline seen in 1Q of the previous three years). Vehicle finance and home equity disbursements grew ~16% and 11% YoY, respectively. In the vehicle finance segment, HCV (+95%), LCV (+16%) and used CV (+12%) reported relatively higher growth, while tractors de-grew ~25/10% YoY/QoQ because of weak monsoon.

AUM growth: AUM growth of ~9% was at a multi-quarter low led by the key vehicle finance segment (~3/1.1% YoY/QoQ, ~68% of AUM). We believe AUM growth is close to bottoming out. Home equity portfolio continued to report stronger growth of 25% and increased its share to ~30% vs. 25% in FY14. Other business segments such as home loans, MSME, etc, form just ~2% of AUM.

Asset Quality Deteriorates AUM Growth Continues To Be Moderate

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research

Disbursements were flat QoQ, despite being a seasonally weak quarter. In 1QFY15/14/13 disbursements declined ~13/14/12% Q-o-Q Home equity disbursements were healthy at ~16% YoY In the vehicle finance segment, the CV segment (HCV, LCV and used) reported relatively higher growth vs. tractors (de-growth of ~25/10% YoY/QoQ) AUM growth of 9/2% YoY/QoQ was driven by home equity growth of 25/6% YoY/QoQ Bank borrowings stood at ~54% of the total borrowings; NCDs form ~25% Calc. NIMs improved ~100/38bps YoY/QoQ to 7.6% Provisions jumped 33/84% YoY/QoQ with rise in GNPAs and PCR At 150 DPD, GNPA stood at 3.3% and NNPA at 2.1% Vehicle finance NPAs was at 3.8% and home equity at 2.8%

30.0

40.0

50.0

60.0

70.0

80.0

90.0

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

GNPA % NNPA % PCR (%. RHS)

-

2.0

4.0

6.0

8.0

10.0

12.0

-

50

100

150

200

250

300

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

AUM (Rs bn) % growth (RHS)Rs bn

Page | 17


Five Quarters At A Glance: Cholamandalam Investment & Finance

1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 Y-o-Y growth Q-o-Q growth

P&L Account (Rs mn)

Net Interest Income 3,844 4,113 4,584 4,498 4,863 26.5% 8.1% Non Interest Income 93 90 65 21 39 -58.1% 83.1% Total Income 3,937 4,203 4,650 4,519 4,902 24.5% 8.5% Expenses 1,721 1,898 1,965 1,904 2,128 23.6% 11.8% Operating profits 2,216 2,305 2,684 2,615 2,774 25.2% 6.1% Provisions 806 863 997 581 1,069 32.7% 84.0% PBT 1,410 1,441 1,687 2,034 1,705 20.9% -16.2% TAX 479 490 574 677 603 25.7% -11.0% PAT 931 951 1,113 1,356 1,103 18.4% -18.7%

Balance Sheet items (Rs bn)

Disbursements 31.9 30.3 30.8 35.1 35.1 10.0% -0.1% CV 23.2 21.9 22.9 25.6 25.9 11.5% 0.9% HE 7.2 7.2 7.5 8.6 8.3 16.1% -3.1% AUM 239.1 244.7 247.4 254.5 260.6 9.0% 2.4% CV 173.3 174.7 174.1 176.4 178.3 2.9% 1.1% HE 61.5 64.9 68.3 72.8 76.8 25.0% 5.5% On books 204.3 212.2 217.4 219.0 231.3 13.2% 5.6% Off books 34.8 32.5 29.9 35.5 29.3 -15.9% -17.4%

Borrowings 190.9 199.6 202.6 194.8 206.1 8.0% 5.8%

Profitability (Calculated)

Yield on Advances (%) 14.6 15.1 15.6 14.9 15.3 67 bps 34 bps Cost of Funds (%) 10.2 10.2 9.9 9.8 9.9 -34 bps 11 bps

Spreads 4.4 4.8 5.6 5.1 5.4 100 bps 23 bps

NIM (%) 6.5 6.8 7.5 7.2 7.6 103 bps 38 bps Cost-Income ratio (%) 43.7 45.2 42.3 42.1 43.4 -31 bps 127 bps Tax rate (%) 34.0 34.0 34.0 33.3 35.3 136 bps 204 bps Asset quality Gross NPA (Rs mn) 5,739 6,362 6,926 7,890 8,600 49.9% 9.0%

Net NPA (Rs mn) 2,630 3,426 3,710 5,091 5,420 106.1% 6.5% Gross NPAs (%) 2.4 2.6 2.8 3.1 3.3 90 bps 20 bps Net NPAs (%) 1.1 1.4 1.5 2.0 2.1 98 bps 8 bps Coverage ratio (%) 54.2 46.2 46.4 35.5 37.0 -1720 bps 149 bps Source: HDFC sec Inst Research

Higher provisioning costs (LLP 1.7% ann.) restricted PAT growth

LCV grew ~16/15% YoY/QoQ; tractors de-grew ~26/10% YoY/QoQ

Bank borrowings stood at ~49% vs. 52/59% QoQ/YoY

Led by combination of home equity (1Q phenomenon) and vehicle finance segment

Expansion led by ~60bps rise in vehicle finance segment. However, home equity business saw 30bps decline

Led by one-off provisions towards VAT (Rs 210mn)

Home equity portfolio stood at ~30% vs. ~26% YoY

Driven by ~9% AUM growth and NIM of 7.6% (+100bps YoY)

Page | 18


Income Statement (Rs mn) FY13 FY14 FY15 FY16E FY17E FY18E

Interest Earned 22,329 28,997 33,366 37,126 42,533 49,668

Interest Expended 14,110 17,711 19,604 21,223 24,063 28,156

Net Interest Income 8,219 11,286 13,762 15,902 18,469 21,511

Other Income 3,228 3,632 3,545 4,099 4,852 5,582

Total Income 11,447 14,918 17,307 20,001 23,322 27,094

Total Operating Exp 5,696 6,582 7,489 8,498 9,701 11,036

PPOP 5,751 8,336 9,818 11,503 13,621 16,057

Provisions & Contingencies 1,243 2,834 3,247 3,596 3,732 4,528

PBT 4,508 5,502 6,571 7,907 9,889 11,529

Provision for Tax 1,444 1,862 2,221 2,649 3,313 3,689

PAT 3,065 3,640 4,350 5,258 6,576 7,840 Source: Bank, HDFC sec Inst Research

Balance Sheet (Rs mn) FY13 FY14 FY15 FY16E FY17E FY18E

SOURCES OF FUNDS

Share Capital 1,432 1,433 1,437 1,560 1,560 1,560

Reserves and surplus 18,216 21,514 25,289 34,594 40,131 46,595

Shareholders’ funds 19,648 22,947 26,727 36,154 41,692 48,156

Borrowings 152,890 180,932 194,752 219,358 257,141 311,673

Other Liabilities 9,310 11,589 12,247 16,338 19,090 21,607

Total liabilities 181,848 215,468 233,726 271,851 317,923 381,436

APPLICATION OF FUNDS

Advances 166,259 194,281 221,835 253,327 297,742 358,525

Investments 2,245 824 675 776 892 1,026

Fixed assets 707 729 683 786 904 1,039

Other Assets 12,637 19,634 15,539 16,962 18,384 20,845

Total assets 181,848 215,468 238,732 271,851 317,923 381,436 Source: Bank, HDFC sec Inst Research

Page | 19


Key Ratios

FY13 FY14 FY15 FY16E FY17E FY18E

Valuation Ratios

EPS 21.4 25.4 30.3 33.7 42.1 50.2

Earnings Growth (%) 64.5 18.7 19.1 11.4 25.1 19.2

BVPS 137.2 160.2 185.9 231.7 267.2 308.7

Adj. BVPS 134.2 148.0 162.9 194.3 225.4 259.6

ROAA (%) 1.9 1.8 1.9 2.1 2.2 2.2

ROAE (%) 18.1 17.1 17.5 16.7 16.9 17.5

P/E (x) 29.9 25.2 21.2 19.0 15.2 12.8 P/ABV (x) 4.8 4.3 3.9 3.3 2.8 2.5 P/PPOP (x) 16.0 11.0 9.4 8.7 7.3 6.2 Dividend Yield (%) 0.5 0.5 0.5 0.7 0.9 1.2 Profitability

Yield on Advances (%) 13.8 13.7 13.7 13.7 13.6 13.3

Cost of Funds (%) 10.6 10.6 10.4 10.3 10.1 9.9

Core Spread (%) 3.2 3.1 3.3 3.4 3.5 3.4

NIM (%) 5.1 5.3 5.7 5.9 5.9 5.8

Operating Efficiency

Cost/Avg. Asset Ratio (%) 3.6 3.3 3.3 3.3 3.3 3.2

Cost-Income Ratio 49.8 44.1 43.3 42.5 41.6 40.7

Balance Sheet Structure Ratios

Loan Growth (%) 41.1 22.4 9.5 13.1 17.5 20.4

Borrowing Growth (%) 33.6 18.3 7.6 12.6 17.2 21.2

Equity/Assets (%) 10.8 10.6 11.4 13.3 13.1 12.6

Equity/Loans (%) 10.3 9.9 10.5 12.6 12.3 11.8

FY13 FY14 FY15 FY16E FY17E FY18E

Asset Quality

Gross NPLs (Rs mn) 1,975.8 4,358.6 8,027.6 10,651.3 13,533.7 17,111.4

Net NPLs (Rs mn) 437.0 1,738.0 5,234.8 5,843.3 6,526.6 7,659.8

Gross NPLs (%) 1.0 1.9 3.1 3.7 4.0 4.2

Net NPLs (%) 0.2 0.8 2.0 2.0 1.9 1.9

Coverage Ratio (%) 77.9 59.7 34.9 45.1 51.8 55.2

Provision/Avg. Loans (%) 0.65 1.22 1.28 1.25 1.10 1.11

RoAA Tree

Net Interest Income 5.20% 5.68% 6.13% 6.29% 6.26% 6.15%

Non Interest Income 2.04% 1.83% 1.58% 1.62% 1.65% 1.60%

Operating Cost 3.60% 3.31% 3.33% 3.36% 3.29% 3.16%

Provisions 0.79% 1.43% 1.45% 1.42% 1.27% 1.29%

Tax 0.91% 0.94% 0.99% 1.05% 1.12% 1.06%

ROAA 1.94% 1.83% 1.94% 2.08% 2.23% 2.24%

Leverage (x) 9.35 9.33 9.04 8.04 7.58 7.78

ROAE 18.12% 17.09% 17.52% 16.72% 16.90% 17.45% Source: Bank, HDFC sec Inst Research

Page | 20


ANNEXURE : QUARTERLY CHARTS Disbursements: Gradual Pickup Disbursements Break-Up Business-Wise

Vehicle Finance Disbursements: Early Signs Of Pickup Segment-Wise Vehicle Finance Disbursements

Home Equity Disbursements: Steady Growth AUM: Moderate Growth Cushioned By Home equity


Disbursements were flat QoQ, despite being a seasonally weak quarter. In 1QFY15/14/13 disbursements declined ~13/14/12% Q-o-Q Home equity disbursements stable at ~24% of total disbursements Vehicle finance disbursements were flat QoQ vs. decline of 17% each reported in 1QFY15/14. In the vehicle finance segment, the CV segment (HCV, LCV and used) reported relatively higher growth vs. tractors (de-growth of ~25/10% YoY/QoQ) After four quarters of single digit growth, home equity disbursements were healthy at ~16% YoY AUM growth of 9/2% YoY/QoQ was driven by home equity portfolio

-10.0

10.0

30.0

50.0

70.0

0.0

10.0

20.0

30.0

40.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Disbursements Rs bn - RHS YoY Growth (%)

80%

80%

83%

82%

80%

76%

78%

76%

73%

72%

74%

73%

74%

19%

19%

17%

17%

20%

24%

21%

21%

22%

24%

24%

24%

24%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16


-20

-

20

40

60

-

10.0

20.0

30.0

40.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle Finance Disbursement Rs bn (LHS) Growth (YoY %)

-

20.0

40.0

60.0

-

2.5

5.0

7.5

10.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Home Equity Disbursement (Rs bn)Growth YoY (%) - RHS

32 31 31 31 29 27 25 24 23 22 21 21 24

32 33 32 32 27 35 35 34 31 34 34 34 31

11 11 11 11 9 8 8 9 8 10 11 13 14

3 3 3 3 3 4 5 7 26 24 24 23 23

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

LCV Used CV HCV Tractors Car & 3 wheelers%

01020304050

0

100

200

300

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

AUM (Rs bn) Growth (YoY %) RHS

Page | 21


AUM break-up: Home Equity Proportion Rises Vehicle Finance AUM: Muted Growth

Segment-wise Vehicle Finance AUM State-wise Vehicle Finance AUM

Home Equity AUM: Steady Growth Continues Borrowing Profile: Bank Borrowings Form 49%


Home equity AUM proportion continues to rise and now stands at ~30% With flattish disbursements, vehicle finance AUM growth remains muted at 9% In the vehicle finance segment, LCV (26%) and used CV (28%) form the major portion Share of tractors have gradually grown to ~10% vs. 7% in 1QFY13 The vehicle finance portfolio remains well diversified across geographies Home equity AUM continues to grow at a healthy rate of 25/5% YoY/QoQ Bank borrowings remain the major chunk of borrowings at 49%

0%

20%

40%

60%

80%

100%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

LCV Used CV HCV Tractors Car & 3W

74 74 75 76 76 75 74 73 72 71 70 69 68

23 23 23 23 23 24 25 25 26 27 28 29 29

0%

20%

40%

60%

80%

100%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle finance Home equity Others

-

20.0

40.0

60.0

80.0

-

50

100

150

200

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle AUM Rs bn YoY (%, RHS)

TN 9% AP (incl. Telangana)

7%

Mah 12%

Chattisgarh 8%

Raj 10%Guj 6%Punjab 6%

Kerala 4%

MP 6%

WB 5%

Delhi 3%

UP 5%

Orissa 4%

KTK 5%

Haryana 3%

Other states 8%

-

10.0

20.0

30.0

40.0

50.0

-

20.0

40.0

60.0

80.0

100.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Home Equity AUM (Rs bn) YoY % (RHS)

0%

50%

100%

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Bank loans Debentures CPs Sub debt CC/WCDL

Page | 22


Gradual NIM Improvement Continues Steady Yields & NIMs in Home Equity Business

Efficiency Ratio: Scope For Improvement Segmental Expenses Ratio: Home Equity Trending Down

Asset Quality continues to deteriorate Segmental Asset Quality : Vehicle Finance remains

Stressed


NIMs jumped ~38bps QoQ led by yield improvement In 4Q, yields were impacted due to shift to 150DPD recognition Home equity NIMs continue to remain steady in the range of 5-5.5%. Vehicle finance NIMs have gradually improved despite asset quality stress One-off provisions (VAT related) towards repossessed assets and continued focus on recoveries have kept C-I elevated Expenses ratio in Home equity continues to decline, while that for vehicle finance remains elevated In 4Q, CIFC shifted to 150 DPD NPA recognition Asset quality deterioration continued, partially attributed to the seasonal 1Q phenomenon PCR marginally improves to ~37% Vehicle finance NPAs at 3.8% and home equity at 2.3%

5.0

6.0

7.0

8.0

9.0

10.0

11.0

14.0

14.5

15.0

15.5

16.0

16.5

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Yields - RHS Cost NIMs

3.0

5.0

7.0

9.0

10.0

15.0

20.0

4QFY

12

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

VH Yields - RHS HE Yields - RHSVH NIMs HE NIMs

2.5

3.0

3.5

4.0

-

10.0

20.0

30.0

40.0

50.0

60.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

C-I (%, LHS) Cost to AUM (%, ann.)

30.0

40.0

50.0

60.0

70.0

80.0

90.0

-

1.0

2.0

3.0

4.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

GNPA % NNPA % PCR (%. RHS)

-

0.5

1.0

1.5

2.0

2.5

3.0

3.2

3.4

3.6

3.8

4.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle Finance Home Equity Finance %

-

2.0

4.0

6.0

-

2.0

4.0

6.0

8.0

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle Finance (LHS) Home Equity (LHS)Vehicle Finance (%) Home Equity (%)

Rs bn

Page | 23


Provisions: On Rise With Deteriorating Asset Quality Segmental Provisions: Home Equity Providing Cushion

Vehicle Finance: GNPA And Pre-tax RoAA Home Finance: GNPA And Pre-tax RoAA

RoAA: Higher Provisions Remains Drag


Provisions continue to rise in line with deterioration in asset quality Home equity provisions have remained stable and provides cushion With asset quality pressure, Pre-tax ROAA continue to decline for the vehicle finance segment Controlled opex and provisioning cost has led to improvement in home equity pre- tax RoAA Despite rise in NIMs and control on opex, RoAA decline is largely led by higher provisions

-

0.5

1.0

1.5

2.0

0200400600800

1,0001,200

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Provisions Rs mn - RHS % of AUM (annu.)

1.4

1.9

2.4

2.9

-10.0

-5.0

-

5.0

10.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16NII Other income OpexProvisions Tax RoA (RHS)

-

0.5

1.0

1.5

2.0

2.5

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Vehicle Finance Home Equity %

-

1.0

2.0

3.0

4.0

5.0

1QFY

13

2QFY

13

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Pre-tax RoAA % GNPA (%)

-

1.0

2.0

3.0

4.0

3QFY

13

4QFY

13

1QFY

14

2QFY

14

3QFY

14

4QFY

14

1QFY

15

2QFY

15

3QFY

15

4QFY

15

1QFY

16

Pre-tax RoAA % GNPA (%)

Page | 24


Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

RECOMMENDATION HISTORY

400

450

500

550

600

650

700

750

800

Oct

-14

Nov

-14

Dec

-14

Jan-

15

Feb-

15

Mar

-15

Apr

-15

May

-15

Jun-

15

Jul-1

5

Aug

-15

Sep-

15

Cholamandalam Invest. TP

Page | 25


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Page | 26

initiating coverage 7 oct 2015 cholamandalam investment...

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