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The Resilient Cholamandalam Inv Fin Co Limited

Cholamandalam, an NBFC with a robust capital base that can effectively absorb liabilities and a track record of success in underwriting. Several significant advantages for the business include its participation in the high-yielding auto loan area, diverse product line, and solid parental support (being a member of the Murugappa group).

The company’ capacity to borrow at favourable terms

The company’s cost of funding is at an impressive 5.7% which turns out to be around 30 to 300 bps lower than those of its rivals. Credit Agencies have provided exceptional ratings to several of the borrowing channels of the firm. With ratings around A1+ and AA+ on most of them. On the borrowing side, the business has a diverse borrower/investor profile. The firm belongs to the behemoth Muruguppa group, along with that, the company has a proven track record and a secured loan book which have allowed the company to acquire loans at reasonable rates. 

Concentrating on Specialised Consumer Segments

The institution has focused on building an automotive financing book. The niche has been intelligently picked by the company to concentrate on the median customer and to leave out the bigger players who have the luxury of borrowing at low rates and also the newcomers that are usually accompanied with a high risk. The high moats due to a secured customer base and the expertise of the firm in this automotive financing segment makes it difficult for new entrants or other fintech firms to compete with Cholamandalam.

The Institution enjoys a higher pricing power

Unlike banks that usually target larger fleet operators that provide a smaller yield, Cholamandalam targets relatively smaller fleet operators that provide the firm with larger yields compared to the banks. Lending expenses have also been controlled in this firm because the asset funded and secured loan character of the product are essential to consumers’ livelihoods. Another factor that puts the firm cut above the rest is that the firm finances a highly diversified vehicle portfolio varying across several categories and regions. So, when banks focus on a single vehicle segment that turns out to be a riskier proposition than Cholamandalam’s portfolio that consists of commercial vehicles used and new, four wheeler and two wheeler passenger vehicles, tractors, agri and construction equipments and besides that the firm possesses a non-automotives focused loan book as well. Thus, this mix of high quality diversified assets has been a key driver of profitability for the firm that are yet to be matched with their rivals.

Equity Multiples

It is not uncommon for good quality financial firms to trade at extraordinary multiples. However, Cholamandalam’s share prices have been observed to be more reasonable relative to other high performing NBFC lenders. Its PE ratio is around 27 as per 30th August, 2022. On the contrary, the stock is already trading near its 52 week high. Brokerage firms and asset management firms have given mixed reviews on the current pricing of the company.  

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