Cholamandalam Investment : BUY

Robust Operating Performance

CIFC* reported robust 4QFY11 performance with strong operating profit growth (of 83%YoY). Biz gained traction with disbursement growth of 31% YoY while asset quality improved. CIFC reported PAT of Rs 135 mn in 4QFY11 (vs. 67 mn in 3QFY11) with strong NII & improving operating efficiency. PAT includes extraordinary expenses of Rs 268 mn arising from impairment prov on inv made in subs (Rs 240 mn) and prov for standard assets (Rs 28 mn). Asset quality improved with Gross NPA ratio improving to 2.61% from 5.5 % in FY10.

Key highlights

• Sanitization process over:  CIFC, which was till recently suffering from credit losses arising from the personal loan (PL) segment, has now completely cleaned up its PL book (now constitute 1% of AUM), while making 100% provisions. Going forward, we expect credit cost to reduce which will provide traction to profits. We expect credit cost of ~0.7% in FY12E improving from the current levels of ~1.5%.
• Strong biz growth: Disbursement growth was robust at 31% YoY and 14% QoQ to Rs 16.8 bn mainly supported by higher disbursement in vehicle finance (47% YoY growth). Total AUM grew  21%  YoY  to  Rs  104  bn  with  on-book  AUM  growing  62% YoY. Securitized portfolio contracted further to 19.8% in FY11 from 40% a year ago.
• Expect strong profits:  In FY11, CIFC has booked Rs 1.7 bn of loan losses towards the PL segment which will not be there in FY12. With lower credit costs and better spreads, we expect ROA to improve to ~1.9x in FY12E from current 0.7x.

BUY rating with a TP of Rs 214 (34% upside from CMP)

The co. is marching ahead towards robust profitability in ensuing years as it has clipped the entire risk arising from its PL portfolio. We believe the valuation differential from its peer group to narrow down as CIFC is witnessing reasonable growth and profit nos. We maintain our BUY rating with a TP of Rs 214 (2.2x FY12E ABV) – implying 34% upside.