After a steep rally, better not overlook risks in Cholamandalam Investment
- CIFC's shares have surged 33% so far this calendar year, significantly outperforming the Nifty Financial Services Index's 1% returns. The market appears to be factoring in the company's ongoing diversification and solid earnings growth, but challenges may lie ahead.
Shares of Cholamandalam Investment and Finance Company Ltd (CIFC) hit a new 52-week high of ₹970 on Friday, as investors cheered the March quarter (Q4FY23) results of the non-banking finance company (NBFC). The robust performance was the result of a significant growth in assets under management (AUM), improving asset quality, and a sequential increase in net interest margin (NIM).
Not only that, CIFC's management provided an optimistic outlook, projecting a compound annual growth rate of 20-25% in AUM over the next three to five years. In Q4, AUM expanded 38% year-on-year (YoY), driven by strong disbursements and traction across verticals. NIM grew 7.79% sequentially, defying analysts' expectations of a decline, as the expansion of high-yielding new business segments offset the impact of rising funding costs.
The management aims to maintain a 7.5% NIM in the long term and keep it at current levels in FY24, despite anticipating a 30-40 basis point increase in funding costs due to lagged effect of interest rate hikes.
However, NIM compression is not the only risk factor. Investec Capital Services (India) Ltd warned of rapid growth in the unsecured loan segment by focusing on 700+ CIBIL score customers.
“CIFC’s Consumer and Small Enterprise Loans (unsecured loans) grew from Rs570 crore to Rs5300 crore in a year. CIFC is a responsible NBFC with a strong track-record. We worry about the sharp growth in the unsecured segment at the sector level," said the Investec report. "The growth is too widespread to be sustainable over the long term we fear but it is hard to pinpoint what will trigger losses in the future," it added.
For now, some brokerages have raised their earnings estimates for CIFC.
“We are revising up our estimates by 15% for FY2024-25E. In our view, the company is likely to deliver 25% loan growth in FY2025E, moderating to 23% until FY2026E. This will drive about earnings CAGR of 23% during FY2024-26E," Kotak Institutional Equities said in a report. While the company is likely to grow higher than pre-covid levels, its superlative growth is unlikely to continue, added the Kotak report.
Meanwhile, CIFC's shares have surged 33% so far this calendar year, significantly outperforming the Nifty Financial Services Index's 1% returns. The market appears to be factoring in the company's ongoing diversification and solid earnings growth, but challenges may lie ahead.
“The stock trades at 4.4x FY24E P/BV. We believe there will be a further expansion in multiples once investors gain more confidence in its execution capability in new product lines without any adverse selection," said analysts at Motilal Oswal Financial Services. BV is book value.
