Cholamandalam Investment & Finance share price: Sharekhan maintains Buy rating with a revised price target of Rs 630

Sharekhan says that Cholamandalam Investment is well placed to benefit from tailwinds for the vehicle financing business, improving CV traction (better fleet utilisation) spurred by improved economic activity led by consumption-driven sectors, e-commerce focused logistics companies, and strong rural demand, which will aid growth in the long-term post COVID-19 recovery

Cholamandalam Investment & Finance share price closed at Rs 561, up Rs 2.4 or 0.4% on Thursday. Cholamandalam Investment & Finance share price has moved to Rs 561 from Rs 539 in one week, up Rs 22 or 5%. Sharekhan says that Cholamandalam Investment is well placed to benefit from tailwinds for the vehicle financing business, improving CV traction (better fleet utilisation) spurred by improved economic activity led by consumption-driven sectors, e-commerce focused logistics companies, and strong rural demand, which will aid growth in the long-term post COVID-19 recovery. Rise in fuel price has been largely compensated by increasing freight rates (as per media reports).

Cholamandalam Investment & Finance Management commentary indicates that disbursements are at 80% of pre-COVID levels for vehicle loans; and collection efficiencies have also started picking up as well, which is encouraging. Moreover, Sharekhan expects a strong rural economy and demand to be seen (aided by a good Rabi harvest, expectations of normal monsoon for 2021, and higher cropping among others), which will be supportive for tractor demand in particular and vehicle demand in general. With 80+% branches in rural areas, towns, and semi urban areas for Cholamandalam Investment & Finance, its business mix gives a clear advantage to capitalise on the uptick in rural demand.

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Sharekhan says that an important benefit of the strong demand and improved economic scenario will be that it will help lower liquidity maintenance by NBFCs. As NBFCs dial down on the liquidity held on the balance sheet, not only the same will lead to better yields, but will also help provide positive support to margins. Cholamandalam Investment & Finance had 6.9% of its balance sheet in liquid assets; and hence, a decline in liquidity levels will be positive support for margins. Along with growth, asset-quality wise, Cholamandalam Investment & Finance is relatively better placed compared to peers.

Sharekhan says that a low burden on profitability going forward would enable faster revert to the company’s growth. The company has consistently balanced robust growth, while maintaining its asset-quality range over cycles, which indicates the quality of business and management.

Sharekhan added that NIM tailwinds and lower credit costs for FY2023E will result in ROE of 20+% along with the possibility of ECL release, which will further support earnings. Factors such as improving asset-quality outlook (improving collections efficiency and high provision cover) are encouraging. A diversified product basket, parentage of the Murugappa Group, and strong historical underwriting make Cholamandalam Investment & Finance among the best players in the vehicle financing space.

It has maintains a Buy rating with a revised price target of Rs 630

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