Q2FY24 Review: CIFC: Monitoring AQ trends, unperturbed currently

6 Nov 2023 , 02:53 PM

CIFC reported in-line results with strong growth (AUM: 42% YoY), 10bps QoQ NIM expansion offset by higher opex (annual increments) and improving AQ (60bps lower QoQ net slippages). Management called out higher stress in Fintech originated unsecured loans (4.7% NPA vs 0.8% for traditionally sourced) and intends to reduce its share. Analysts of IIFL Capital Services derive comfort from low share of Fintech sourced loans (1.5% of total AUM), management intention to increasing reliance on traditional sourcing channels and 10% cap on total unsecured loans (7% currently). Retain BUY with unchanged TP of Rs1,400 using their RISQ framework, implying 4.5x 2YF P/B, for 20% ROEs and ~30% EPS growth. 

In-line results: 

Q2FY24 results were broadly in-line with strong AUM / disbursement growth of 42%/47% YoY. NII growth was strong at 9% QoQ as margins expanded 10bps QoQ, offset by higher opex (explained by annual increments). AQ improved with net slippages declining 60bps QoQ and stable write offs, credit costs at 1.3% (ann.) were largely due to writeoffs and increased PCR on GS3 for VF and new segments.

Fintech sourcing to be curtailed on higher NPAs: 

Unsecured loans sourced through FinTechs (ATS 50k) had 4.7% NPA vs 0.82% on loans sourced through traditional channels (ATS 300k). Consequently, management intends to increase share of traditional channels including through its own digital app (Chola One). Analysts of IIFL Capital Services derive comfort from low share of Fintech sourced loans (1.5% of total loan book), increasing reliance on traditional sourcing channels and 10% cap on overall unsecured loans (7% currently). 

Retain BUY with TP of Rs1,400: 

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. While absolute valuations are rich at 4.1x FY25 P/B, the same appear reasonable adj. for Rs20bn CCD conversion in FY26 & superior profitability (20% ROEs) and growth (29% EPS Cagr).