Q1FY24 Review: CIFC: NIMs have likely bottomed; underlying AQ in new businesses stable

3 Aug 2023 , 12:48 PM

Chola reported sector-leading AUM growth of 40% YoY (8% QoQ), with strong growth across all business segments. Bottomline miss was due to 30bps NIM compression QoQ. However, analysts of IIFL Capital Services believe margins have bottomed out and should recover from H2. Underlying AQ remained stable, including in new businesses where bounce rates were 5.6% in unsecured loans vs industry average of 12-13%. They tweak their EPS estimates by 4-7% to account for the miss in Q1. Retain BUY with TP of Rs1,330 for 20% ROEs and 30% earnings growth. 

Strong growth momentum to continue; margins have bottomed out: 

40%/50% YoY AUM and disbursement growth was broad-based for Chola. Analysts of IIFL Capital Services expect it to grow at 27% Cagr over next 3 years, led by distribution expansion (HL and LAP) and continued scale-up of new businesses. They believe margins have bottomed out and expect recovery from H2, as the share of VF book originated in the last 12 months (~100 higher yields) increases, 30bps of additional rate hike in July starts reflecting, share of new businesses increases and benefit from equity raise flows through. 

AQ stable; slippages inched up on Q1 seasonality: 

With GS3 inching up 5bps QoQ, AQ was stable. Net slippages were up to 1.8% (ann.) due to Q1 seasonality in VF. Implied credit costs in new businesses rose QoQ from 1.6% to 5% (ann.), on account of standard asset provisioning (book growth) and FLDG reimbursement being recorded under Other income. Underlying AQ remained healthy with bounce rates in unsecured loans at ~5.5% vs industry average of 12- 13%. Analysts of IIFL Capital Services forecast 125-140bps credit costs over next 3 years vs LTA of 120bps. 

Retain BUY with TP of Rs1,330: 

Analysts of IIFL Capital Services continue to like Chola for its sector-leading growth, on the back of new businesses and distribution expansion for existing products. They have built Rs30bn of fund raise that adds ~300bps to Tier 1 of 15.1% and Rs29/share to the Jun’23 BVPS of Rs183. While absolute valuations are rich at 4.2x 1YF P/B, the same appear reasonable adj. for superior profitability and growth (bottom 1/3rd on PEG basis across banks and NBFCs).