CHOLAFIN - Cholamandalam Investment and Finance Company Ltd Share Price

The management of Cholamandalam Investment and Finance Company outlined the following outlook and key points during the Q3 FY25 earnings call:

Growth & Performance:

• Maintains 25% AUM growth guidance for FY25 and beyond, driven by diversified segments. Disbursements grew 15% YoY in Q3, with vehicle finance (+16%), LAP (+23%), and home loans (+15%) leading expansion.
• Vehicle finance expects improvement in asset quality as small/light commercial vehicle utilization recovers (from 50% to 70-80% capacity). Heavy commercial vehicle stress (linked to GDP/IIP) may take 3"“4 quarters to stabilize.
• New businesses (LAP, home loans, SME) aim for 25"“40% AUM growth, with home loans targeting 15% disbursement growth and LAP focusing on resolution-driven asset quality.

Asset Quality:

• Stage 3 assets (90+ DPD) rose to 2.91% (vs. 2.83% in Q2), driven by SME and CSEL partnerships. GNPA increased to 4% (RBI basis).
• CSEL's delinquency will decline as partnerships phase out by FY26. SME resolution via SARFAESI expected to improve reversals in FY26.
• Credit costs (~155"“160 bps in Q3) likely to decline in FY26 due to stabilization in vehicle finance and exit from high-risk partnerships.

Margins & Liquidity:

• NIM expansion anticipated if rate cuts occur, benefiting fixed-rate vehicle finance (56% of book). Liquidity remains strong at Rs.15,677 crores.
• Opex-to-assets (3%) may stay elevated temporarily due to growth investments but should stabilize as collections and tech efficiency improve.

Capital & Dividend:

• Capital adequacy at 19.76% (Tier 1: 14.92%). Interim dividend of Rs.1.30/share declared.

Key Risks:

• Rural consumption and industrial activity impacting CV utilization. Systemic stress in affordable housing/LAP monitored but deemed manageable via stringent underwriting.

Management remains confident in achieving growth targets while managing asset quality and margins, with FY26 credit costs expected to improve YoY.

Question 1: Dhaval Gada (DSP)
"Last quarter, we commented that generally, we expect Stage 3 assets to improve in the second half. If you look at Slide 29, the improvement is less, with increases in newer businesses. Could you discuss whether this is in line with expectations and if Q4 will see improvement? Additionally, for CSEL and SME (Slides 67-68), what are the steady-state credit costs?"
Answer: Stage 3 increased due to higher NCLs in CSEL's partnership portfolio (to be phased out by FY26) and delayed SME resolutions via SARFAESI. SME credit costs should stabilize at 0.5% long-term. CSEL's credit costs will decline as partnerships wind down. Asset quality will improve gradually, with Q4 likely better but slower than past years.

Question 2: Dhaval Gada (DSP) "“ Follow-up
"On growth, last time you mentioned 25% medium-term growth. Does this hold for next year?"
Answer: The 25% AUM growth target remains unchanged for FY26, supported by diversified segments like vehicle finance, LAP, and home loans.

Question 3: Dhaval Gala (Aditya Birla Sun Life AMC)
"What is the outlook on NIMs amid rate cycles, and should Q4 asset quality follow historical seasonal improvements?"
Answer: Borrowing costs lag rate cuts by a quarter. Q4 asset quality will improve but less sharply than previous years due to macro challenges (e.g., lower capacity utilization). Vehicle finance NCLs are stabilizing, with resolution progress expected in 3"“4 quarters.

Question 4: Akshay Jain (Autonomous Research)
"Why are credit costs elevated (~155"“160 bps)? Is stress in vehicle finance widespread? Also, clarify SBPL's performance."
Answer: Higher credit costs stem from LAP/Housing normalization (reversals ending) and stressed segments (SCV, tractors). SBPL's steady-state NCL is 1.5"“2%, with ROA at 6%. Vehicle finance stress is product-specific (SCV/used CV improving since Nov'24). GNPA diverges from Stage 3 due to partial recoveries.

Question 5: Harshit Toshniwal (Premji Invest)
"How has headcount shifted toward collections, and will cost ratios remain elevated?"
Answer: 55% of recent hires are in collections, with 31,000 dedicated to recovery. Productivity dipped due to lower disbursements, but cost ratios will stabilize as new businesses mature.

Question 6: Raghav Garg (Ambit Capital)
"What drives LAP's NPL increase, and what's the credit cost guidance for FY26?"
Answer: LAP NPLs are stable (Stage 3 at 2.25%); fluctuations reflect normal roll-forwards. FY26 credit costs will decline YoY, led by vehicle finance improvement. CSEL's partnership disbursements (Rs.1,200Cr in Q3) will phase out.

Question 7: Abhijit Tibrewal (Motilal Oswal)
"Why the 3"“4 quarter timeline for credit cost normalization? Is macro recovery needed?"
Answer: Heavy CV stress (tied to GDP/IIP) requires broader economic recovery, while SCV/LCV improvements are gradual. Vehicle finance NCLs will decline from Q4 but normalize fully in 3"“4 quarters.

Question 8: Pranuj (JPMorgan)
"Why are LAP disbursements slowing, and can Home Loans sustain 16% yields amid growth?"
Answer: LAP disbursements dipped due to procedural delays but will recover. Home Loans target 15% disbursement/30% AUM growth via pan-India expansion, with yields stable via operational efficiency.

Question 9: Hardik Shah (Goldman Sachs)
"How much of LAP is repo-linked, and what's the transmission lag if rates fall?"
Answer: LAP pricing follows internal benchmarks tied to borrowing costs. Transmission lags depend on bank MCLR adjustments, likely 1"“2 quarters.

Question 10: Subramanian Iyer (Morgan Stanley)
"Clarify the Rs.65Cr gain from derecognition and FLDG accounting."
Answer: The gain reflects portfolio assignment to a bank. FLDG income (1% of CSEL's ECL) is booked in other income, inflating reported NCLs.

Question 11: Piran Engineer (CLSA)
"What are LAP/Home Loan growth targets, and how are used car delinquencies trending?"
Answer: LAP targets 25% disbursement/35"“40% AUM growth; Home Loans aim for 30% AUM growth. Used car delinquencies are improving, with no systemic stress.

Question 12: Chandra (Fidelity)
"Why the 3"“4 quarter credit cost lag despite improving early delinquencies? What's the opex outlook?"
Answer: Existing Stage 3 cases require time for resolution (cash flow recovery). Opex/asset (3%) will stay elevated due to growth investments but stabilize post-FY26.

Question 13: Vikram Subramanian (Marshall Wace)
"Why no sharp Q4 credit cost decline despite utilization recovery?"
Answer: Stage 3 customers need sustained repayment capability, which lags utilization improvements. Opex will stay flat near-term but decline as collection hiring stabilizes.

Question 14: Renish Bhuva (ICICI Securities)
"Why rising vehicle finance opex (3.4% vs. 2.8% in Q1'24)?"
Answer: Higher collection hires and lower sales productivity (due to SCV/LCV stress) drove opex up. Efficiency gains from stabilized manpower will reduce opex from FY26.

Question 15: Kunal Shah (Citi)
"How sustain 25% AUM growth amid slower disbursements?"
Answer: Disbursement run rates (18%) and portfolio tenure (e.g., Home Loans) support AUM growth. Vehicle finance opex will ease as collection hiring plateaus.