Buy Cholamandalam Investment, target price Rs 340: IDBI Capital

IDBI Capital has a buy rating on Cholamandalam Investment with a target price of Rs 340. While the uncertainty around the economy over the impact of Covid-19 weighs on the valuation in the near term, the brokerage expects the NBFC to re-rate further as clarity emerges.

Cholamandalam has passed through the NBFC crisis with better asset quality and strong AUM growth as compared to its peers, thanks to a well diversified vehicle loan portfolio across different segments, lower dependency on any geography and strong backing from the Murugappa group.

The share price has moved up by 2.32 per cent from its previous close of Rs 299.15. The tock last traded stock price is Rs 306.10. Container Corporation of India Ltd., incorporated in 1988, has a market cap of Rs 18,217.90 crore, operating in the logistics sector.


Investment Rationale

The annual report FY19 highlights the strategy for Phygital which is the way ahead for the company. Phygital means enhancing physical presence with digital technology. Digital technology puts the historical data of consumers into action by prioritizing the collection team to work smartly.

Analytical data of past history of the consumers is used to arrive at a credit score which makes for an easier decision to lend or reject the borrower.

Diversification has allowed Cholamandalam to grow higher than industry average. It’s AUM grew at 21 per cent CAGR (FY14-19) as against NBFC AUM at 17 per cent CAGR (Crisil NBFC Data). Loan growth is expected at 14.5 per cen tCAGR (FY19-22) and margins to improve resulting in 30bps improvement in ROA by FY22 to 2.6 per cent. The brokerage expects the improvement in return ratios to lead to further re-rating.

Post the decline, the stock trades at an attractive valuation i.e. P/ABV of 2 times FY21E numbers and 1.7 times FY22E numbers. IDBI Capital has initiated a buy rating on Cholamandalam Investment rating with a target price of Rs 340, valuing it at 2.4 times P/ABV FY22.

Financials

For the quarter ended December 31, 2019, the company has reported consolidated sales of Rs 1544.74 crore, down -12.01 per cent from last quarter sales of Rs 1755.61 crore and down -7.62 per cent from last year same quarter sales of Rs 1672.08 crore. The company has reported net profit after tax of Rs 171.94 crore in the latest quarter.