CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY

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Cholamandalam Investment and Finance Company Limited (CIFCL) is a part of 120 years old Murugappa Group . The company is engaged in financial and investment service with its is headquarters in Chennai. The company has total assets under management of more than Rs 65,000 crore with a Net income of Rs 1,198 crore as on March 31, 2019. The company was also ranked 9th among the top 50 NBFCs in India by The Banking and Finance Post.

Over the past 40 years, CIFC has emerged as a comprehensive financial services provider offering vehicle finance, home loans, home equity loans, SME loans etc. Vehicle finance (VF) and home equity (HE, also known as loans against property) are the largest lending segments for CIFC currently.

Currently CIFCLs has 1029 branches across the country. It employees over 7,000 employees and also has about 16,000 people who assist in various business activities, with the majority being in smaller towns.

Cholamandalam Home Finance Limited (CHFL)

Cholamandalam Home Finance Limited (CHFL) is of the belief that every family should own a home. CHFL offers home loans to suit all budgets with convenient repayment options and fast track approval process. CHFL offers home loans for construction of houses, purchase of new home and balance transfer of the home loans from other financial institutions.

Cholamandalam Securities Limited (CSEC)

Chola Securities is a wealth management company offering investment solutions to individual clients and stock broking and equity advisory services to institutional investors, including many of the largest mutual funds in India. Chola Securities is a member of Bombay Stock Exchange Limited and National Stock Exchange of India Limited.

About Murugappa Group

Founded in 1900 Murugappa Group is one of India’s leading business conglomerates. The Group has 28 businesses including nine listed Companies which include Carborundum Universal Ltd., Cholamandalam Financial Holdings Ltd., Cholamandalam Investment and Finance Company Ltd., Cholamandalam MS General Insurance Company Ltd., Coromandel International Ltd., Coromandel Engineering Company Ltd., E.I.D. Parry (India) Ltd., Parry Agro Industries Ltd., Shanthi Gears Ltd., Tube Investments of India Ltd., and Wendt (India) Ltd.

This companies serve among various sectors such as Abrasives, Auto Components, Transmission systems, Cycles, Sugar, Farm Inputs, Fertilisers, Plantations, Bioproducts and Nutraceuticals. Apart from that the group has strong alliances with leading international companies such as Groupe Chimique Tunisien, Foskor, Mitsui Sumitomo, Morgan Advanced Materials, Sociedad Química y Minera de Chile (SQM),Yanmar & Co. and Compagnie Des Phosphat De Gafsa (CPG). 

Murugappa Group has a wide geographical presence all over India and spanning 6 continents fostering an environment of professionalism and has a workforce of over 50,000 employees.

Vehicle Finance-:

CIFC has a diversified up-country vehicle finance business spread across geographies and segments. 89% of its 1029+ branches are in Tier III, IV, V and VI towns) and segments (LCV, MHCV, used CVs, Cars, 3Wheelers/2Wheelers etc).

The loan-to-value (LTV) ratio is in comfortable range at ~79%. One of the key strengths of the company is the relationship built over the years with the OEMs and auto dealers. CIFC has strong relationship with Tata Motors, Eicher, M&M and Ashok Leyland.

Along with product diversification, CIFC also hires specialized personnel for each sub-segment. The company has 3 product teams each focusing on used CV, new vehicles and tractors which helps in pursuing subsegmental growth.  The book is skewed towards LCV and used vehicles (~47%). Typically Used CV, Tractors, Two Wheelers (2W) and Three Wheeler/SCV (3W) have higher yields followed by LCV and Cars which have medium yields. HCV and Construction Equipment (CE) are low yielding.

Almost 65% of disbursements in Commercial Vehicle (CV) are to micro & small enterprises and agri-based customer segment. CIFC has strategically positioned itself in the middle to lower end of the opportunity pyramid by targeting small road transporters (SRTOs) for new vehicles, first-time users and small ticket operators (for used vehicles). 

In used vehicle segment, the yields are higher but at the same time risk of default also increases. The higher yield compensates for the dip in asset quality

Under tractor financing, CIFC lends ~65% to agri-based customers – medium, small and marginal farmers and first time buyers/users/tenant farmers. This is the farmer community, already being served by other group companies such as EID and Coromandel International, thus leveraging group companies relationships.

Post slowdown in FY14/FY15, disbursals in vehicle finance picked up growing at 26% CAGR over FY16-FY19. However, growth during this period has been uneven given a conscious decision to slow down due to lower underlying demand.

Over the last couple of years, foreseeing the pick-up in construction and infra activities, the company started disbursing CE loans (5% AUM)

Housing Segment-:

To provide cushion and stability to loan growth and earnings, CIFC diversified into the home equity (LAP- loan against property) business in FY07 and is one of the early entrants in the LAP segment.

CIFC provides LAP (at floating rates) with LTVs in the range of 50-52%, tenure of 5-7 years and average ticket size of ~Rs 5mn, with predominant focus on self-occupied residential properties (SORP), which is considered a safer segment within LAP.

CIFC offers this product through 256 branches (250 colocated with VF) at present from 80 branches in FY16 and focuses on self-employed non-professional individuals in the middle socio-economic class.

Post high growth of +35% over FY10-FY14, HE growth stabilised at +20% over FY15/FY16. But structural headwinds on account of demonetisation and GST implementation led to growth slow down in FY17/FY18.

CIFC’s large branch network, under-penetrated MSMEs and weak capital position at PSBs lead to believing that CIFC’s home equity loan book can grow at a CAGR of 13% over FY19-FY22E.

Operations-: (MIX)

CIFC has a well-diversified loan book with presence across secured asset segments such as vehicle finance – VF ~74% (trucks, cars, tractors, used vehicles) and home equity – HE ~21% (or loans against property (LAP).

It has entered into new segments (~5%) like home loans – HL and SME lending in recent years.

The loan book is well diversified across geographies de-risking its business geographically. 89% locations are in Tier-III, TierIV, Tier V and Tier-VI towns

To handle competition from bank and new NBFCs in metros, company has been expanding incrementally in rural areas which offer higher yields. This will help CIFC to maintain pricing and margins.

Rural branches constituted 79% in FY19 increasing from 71% in FY15. As per company’s experience, 70-80% of the branches breakeven within first year of operation. This is possible by use of technology which leads to productivity improvement.

CIFC branch expansion has been well calibrated over the years. Over FY14/15/16, it went slow with branch additions on general macro slowdown. Over FY17/18 company ramped up expansion adding 336 branches. However, in FY19 it added only 41 branches. In H1FY20, it has added 114 branches. This leaves ample scope for ramping up on macro recovery to play out as branches mature.

Disbursements over FY11-15 grew at a CAGR of 22%. FY15 was a tough time for the company with disbursal de-growth of 2% (VF down 8%). Over FY15-19, disbursals grew 19% CAGR. Compared to its peers, disbursal growth has been largely maintained due to CIFC’s diversified VF mix

New segments (~5% of AUM, Rs 27bn) launched included in Other segments are Home Loans, SME, Trip Loans and Agri Loans.

MSME: It involves bill discounting or term loans for SMEs (within Murugappa ecosystem for the near term, and the possibility of expansion later). Yield would be in the range of 12- 13%.

Trip Credit: CIFC is piloting a new product that provides short-term financing to truckers to meet their trip expenses. Tenure is of 45-90 days and yield in the range of 18-20% with average ticket size of Rs40,000-50,000. This would be largely in HCV financing, as LCV segments will not be relevant due to shorter trip tenures and payment cycles

Agri: The company has started a pilot in partnership with group company Coromandel Fertilisers extending loans to farmers who purchase through the latter’s retail outlets.

Asset Quality-:

CIFC’s asset quality performance vis-a-vis peers was better on account of management’s proactive and prudent steps taken by pulling back disbursements and credit norms tightening. It transitioned early to the 90DPD stress recognition norm.

CIFC’s overall asset quality performance over the past three years stands out among peers, with overall credit costs staying below 150 bp, and GNPAs at 2.7% (vs 7-8.5% for peers).

borrowers, rising proportion of less risky home equity segment and diversified portfolio across regions/segments, we see asset quality risk to be in control, though marginally up on sectoral headwinds.

Financials-:

The total income grew 23 per cent to Rs 2,289.3 crore during the quarter, as compared to Rs 1,860.58 crore posted in the corresponding period of the previous year.

The company will be issuing shares to its promoter entity Cholamandalam Financial Holdings Ltd to raise around Rs 300 crore in one or more tranches.

Vehicle finance business saw a decline of 5.22 per cent during the quarter ended December 2019, at Rs 5,949 crore as against Rs 6,277 crore for the same quarter of the previous year. 

Home equity disbursement for the quarter was at Rs 908 crore as against Rs 954 crore for the same quarter of last year. 

The Assets Under Management (AUM) grew by 25 per cent at Rs 65,992 crore year-to-date as of December 2019 as compared to Rs 52,591 crore in the same period last year.

In Q3 of FY20, faced with the slowdown in the auto sector we changed our product mix to shore up our net interest income.

Going Forward-:

With its subsidiary White Data Systems India Pvt Ltd, CIFC has introduced “i-Loads”, an integrated technology solution for truck owners. Its a 100% free online market place for buying and selling used CVs.

i-Loads platform is that of a freight aggregator and helps truckers and transport owners procure return-loads that help save time, resources and money. Besides helping the customer secure load, the platform is also helping the company to understand the CV cycle better.

Other digital initiatives like customer facing app with customer service module, Pay Now feature and Gaadi Bazaar (vehicle auction platform) reflect the company’s drive to capitalize technological advancements to supports and sustain its growth ambitions.

Over FY19-22E, with 15% CAGR in AUMs and 16bps NIM improvement, It is expected ~18% CAGR in NII. Further, controlled opex growth (17% CAGR) and largely stable credit costs (71bps) will be the key drivers for growth in earnings (and thus ROAA improvement).

It is expected loan CAGR of 15% over FY19-FY22E with sectoral headwinds in VF and HE segments leading to lower disbursements. However, diversified mix will support growth.

It is expected GNPAs to marginally go up to 2.9% over FY19- FY22E on sectoral headwinds. However, diversification across segments will help better management of asset quality vis-a-vis peers.

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