Street shrugging off likely credit cost pain for Cholamandalam Investment

While management believes it has made adequate Covid-19 provisioning, analysts are skeptical

With eight per cent gains in August so far, the stock of Cholamandalam Investment and Finance Company (Cholamandalam) has outperformed the Nifty Financial Services index, which is marginally down during the same period. Investors have taken stock of factors such as better-than-expected disbursements, some progress in repayment in moratorium book and the management’s commentary, which indicate no significantly excess Covid-19 credit cost (provisioning as percentage of loan book) going ahead.

In the June 2020 quarter (Q1), the company did not provide for Covid-19 as the management believes adequate provisions had already been made in the March 2020 quarter, which is 90 basis points of its assets under management or AUM. However, analysts expect Cholamandalam would need to step up its credit cost going ahead given uncertain economic situation. For instance, “the larger disappointment was on account of lower Covid-19 related provisioning,” analysts at PhillipCapital said in their Q1 report of July 31. This is due to the collection trend in moratorium book.

While 50 per cent of company’s customers under moratorium (total moratorium 76-77 per cent of AUM) have started repaying their dues, only 17 per cent of them have paid 3 or more instalments. The remaining 33 per cent have paid only up to one instalment, due to which, the above mentioned analysts believe that lower provisioning leaves balance sheet vulnerable to sudden shocks. PhillipCapital has downgraded the stock to ‘neutral’ post Q1 result.

Analysts at Equirus have also downgraded the stock to ‘add’ from ‘long’ earlier due a likely increase in slippages and credit cost.

Though the Reserve Bank of India has allowed restricting for Covid-19-led delinquencies, last week, to what extend it would soften lenders’ provisioning pain needs to be seen as it would depend on quantum and current asset classification of loans going under restructuring. Some analysts are of the opinion that it is unlikely to lower lenders’ provisioning requirement materially at least in the near term. Even for the restructuring accounts, lenders would need to provide minimum 10 per cent.

Nonetheless, Cholamandalam’s diversified portfolio, higher rural exposure, strong capital position (tier-1 capital ratio at 15.8 per cent), good liquidity status provide comfort. In fact, the company surprised the Street with better-than-estimated disbursements (though they were down 58 per cent year-on-year), which improved significantly in June and achieved 70 per cent of the year-ago levels. This was supported by tractors and construction equipment segments.

Overall, how the company’s disbursement and asset quality trend pan out would be crucial for the stock given the current outperformance.