Chola top performer among vehicle financiers, shows sustained growth

Company does better than rivals in categories like assets under management and loan distribution, say analysts.

Stocks of vehicle financiers are back in vogue. The shares of Mahindra & Mahindra Financial Services and Shriram Transport Finance have witnessed a 12-30 per cent year-to-date stock price appreciation. However, with nearly 40 per cent year-to-date gains, it’s Cholamandalam Investment and Finance Company (Chola Finance) walking away with the prize. Even on a one-year basis, while its peers have regained the pre-Covid stock price levels largely owing to the rally since October 2020, Chola Finance’s rally is a more sustained one, and with the price appreciation of 2.5 times, it is the top performer in the financial services space.

Its highly diversified vehicle finance portfolio (accounting for 73 per cent of the assets under management, or AUMs) has helped the lender get back to its feet faster than its peers. For instance, with over 30 per cent of the AUMs coming from cars, two-wheelers, and tractors, the sales of which rebounded faster than commercial vehicles (CVs), Chola Finance’s disbursements picked up from June. Subsequently, with the CV segment (accounting for 30 per cent of vehicle AUMs) gaining momentum in the December quarter, Chola was ahead of the pack with a 6 per cent year-on-year increase in disbursements, while those of its peers were flat.

“Disbursements have been superior against peers, while collection efficiency has consistently been above 100 per cent for the past few months,” say analysts at Motilal Oswal Financial Services.

Home loans account for 22 per cent of the lender’s AUMs. It has 1,100 branches, 235 added particularly to cater to the demand for loans against property. Affordable housing is expected to provide an additional leg of growth in the coming years. With 15 per cent overall AUM growth anticipated in FY22, analysts at IIFL Securities feel Chola Finance’s growth may be ahead of peers.

Better disbursements and near 100 per cent collection efficiency maintained soon after the moratorium was lifted in August last year have helped Chola Finance post better asset quality than its competitors. As against more than 7 per cent gross stage-3 assets (or non-performing assets) posted by peers, Chola’s proforma gross stage-3 ratio came at 3.8 per cent. While this was higher by 25 basis points year-on-year, what’s comforting is that the bad loan ratio in Q3 is well behind the recent 4.7 per cent peak seen in FY17 — the post-demonetisation quarters when CV lenders were worse hit.

“Chola has acquired the status of a quality lender in a ‘not so quality’, difficult to operate in informal customer segments,” say analysts at Morgan Stanley.

This is why even if valuations have soared to 4x the FY22 estimated book, analysts at IIFL and Morgan Staley believe there is more room for re-rating.