Buy Cholamandalam Investment, target price Rs 225: Motilal Oswal

Motilal Oswal has given a buy rating to Cholamandalam Investment & Finance with a target price of Rs 225 ( 1.7 times FY22E BVPS). The price marks an upside of 27 per cent over a CMP of Rs 177.

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 billion in the first half of FY21, 40 per cent of the run-rate. As a result, the brokerage estimates a 17 per cent decline in disbursements to Rs 243 billion in FY21.

The share price moved up by 4.26 per cent from its previous close of Rs 150.35. The last traded price is Rs 156.75. Incorporated in 1978, the NBFC has a market cap of Rs 11931.35 crore.


Investment Rationale

The lower-than-expected disbursements in the fourth quarter of FY20 cannot be attributed to the Covid-19 impact alone, says the brokerage. 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.

In FY21, the demand recovery 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, the brokerage has increased its FY21/FY22 credit cost estimates to 1.8 per cent/1.3 per cent from ~0.8 per cent. As a result of slowing AUM growth and higher credit costs, the brokerage has cut its FY21/FY22 EPS estimates by ~25 per cent.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 2289.06 crore, up 3.47 per cent from last quarter sales of Rs 2212.27 crore and up 24.39 per cent from last year same quarter sales of Rs 1840.28 crore. The company reported net profit after tax of Rs 389.15 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 52.9 per cent stake in the company as of the third quarter ending December 31, 2019, while FIIs held 16.6 per cent, DIIs 21.5 per cent and public & others 9 per cent.