Home / Markets / Mark To Market /  Cholamandalam Finance’s mettle put to test as investors grow wary

Cholamandalam Investment and Finance Company Ltd has weathered the covid-19 pandemic far better than its peers in FY21 and investors have rewarded it by making its shares outperform the broad market. However, the question that arises is whether the Murugappa group’s vehicle financier will be able to do a repeat performance in FY22.

Investors don’t seem to be so sure about the company being unscathed by the second wave of the pandemic. Even the company’s management sounded cautious on the outlook. The company said its disbursements were affected in April and May by the second wave.

Shares of the lender have dropped 4.5% since it announced its March quarter results late last week. As such, the quarterly performance showed signs of emerging stress, and growth coming under pressure.

Disbursements in the lender’s mainstay vehicle finance segment remained flat sequentially, keeping the overall disbursals largely unchanged. Disbursements had recovered sharply in the previous two quarters after the first three months of FY21 were hit due to lockdowns.

Satish Kumar/Mint
View Full Image
Satish Kumar/Mint

In essence, the company has recovered swiftly from the initial blow of the pandemic. However, whether it can ride the second wave just as well is a concern among investors. “While disbursements would be muted in H1FY22 because of the second covid wave, we expect them to pick up thereafter," analysts at Motilal Oswal Financial Services said in a note.

On asset quality, too, initial signs of stress have emerged. The lender’s stage three assets or bad loans were 3.96% of its book, higher than the 3.75% in the December quarter. Its restructured loan pile is near 2% of its loan book. Analysts at Emkay Global note that asset quality may remain volatile in the June quarter due to lockdowns triggered by the second wave. The provision coverage ratio of 44.3% should give comfort, but the ratio is down from FY20 levels. The lender increased provisions for the March quarter.

What works for Cholamandalam Finance is its healthy liquidity position. Also, the management said that it has beefed up its collection efforts by hiring personnel. The company’s collection efficiency was back to pre-pandemic levels in March and remained high at 93% for April, according to the management. That said, collections in its vehicle finance segment remain a concern.

Despite these emerging troubles, Cholamandalam Finance looks superior compared to peers. Its FY21 metrics trump those of rivals, which is the reason for its premium valuations. For these valuations to stick, the lender would need to keep this distinction intact.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Edit Profile
My ReadsRedeem a Gift CardLogout