CIFC: Management meeting takeaways

14 Jun 2023 , 11:28 AM

Recommendation: Buy; Target Price: Rs 1230

 

Analysts of IIFL Capital Services recently met CIFC senior management and business heads and came out enthused about the company’s medium term growth prospects. Management’s strategy of distribution expansion and new business scale up should drive medium term growth for CIFC. New businesses are being scaled prudently with independent teams for sourcing, underwriting and collections even as they benefit from local knowledge gained by VF team over the years. Retain BUY with TP of Rs1,230 for 21% ROEs and 32% earnings growth.

Mgmt conservatively guiding for ~20% growth; analysts of IIFL Capital Services expect 28% CAGR over next 3Y: Management retained its ~20% growth guidance and 15-20% VF growth in FY24. This is conservative in analysts of IIFL Capital Services view with CIFC historically delivering ~5-10% pts higher growth than its guidance in select years. They expect CIFC to grow at 28% CAGR over next 3Y, on back of: 1) distribution expansion for LAP and HL (40-50% penetration currently) and 2) rapid growth in new businesses having $600bn TAM < 25% penetration. Chola’s branches will further grow as 500+ resident locations graduate into full-fledged branches over time.

Growing new businesses prudently: 

Analysts of IIFL Capital Services believe that CIFC is growing new businesses prudently with well-defined underwriting and collections strategy. Its in-house sourcing team for secured business loans is also responsible for collections with incentives linked to collections. Whereas, its credit filters for unsecured MSME and consumer loans are stringent enough, rejecting 72% of cases. Further, 100%/96%/83% of its PL borrowers have credit scores higher than 675/700/725 respectively.

Potential capital raise to support growth: 

Analysts of IIFL Capital Services expect Chola to continue consuming capital, and with 14.8% Tier 1, they have built Rs30bn of capital raise. While absolute valuations are expensive at 5x 1Y fwd P/B, they appear reasonable adj. for superior profitability, growth (bottom 1/3rd on PEG basis across banks and NBFCs) and capital raise. Retain BUY with TP of Rs1,230 for 21% ROEs and 32% earnings growth.