Cholamandalam Investment & Finance AUM growth and gold loans support FY27 profitability

Investment View and Valuation

Motilal Oswal Financial Services Limited reiterates its Buy rating on Cholamandalam Investment & Finance (CIFC) after a healthy start to FY27. The broker raises its FY27E and FY28E estimates by 9 per cent and 4 per cent, respectively, reflecting lower expected credit costs and higher other income.

Motilal Oswal values CIFC at 4x its March 2028E book value per share to derive a target price of Rs 2,140. At the report CMP of Rs 1,753, the stock traded at approximately 3.9x FY27E price-to-book.

1Q FY27 Financial Performance

CIFC reported strong 1Q FY27 results, with profit after tax rising approximately 46 per cent year-on-year to Rs 1,650 crore, around 14 per cent above Motilal Oswal's estimate. Net interest income increased about 27 per cent year-on-year to roughly Rs 4,040 crore, in line with the broker's estimate. Other income grew approximately 31 per cent to Rs 890 crore.

Operating expenditure rose about 23 per cent year-on-year to around Rs 1,790 crore, also in line with estimates. The cost-to-income ratio declined approximately 140 basis points quarter-on-quarter to 36.3 per cent. Pre-provision operating profit increased about 30 per cent year-on-year to Rs 3,140 crore, around 7 per cent above the broker's estimate. Credit costs of approximately Rs 920 crore were about 8 per cent below the estimate, equivalent to annualised credit costs of around 160 basis points.

AUM Growth and Business Expansion

Business AUM grew approximately 22 per cent year-on-year to Rs 2.34 trillion in 1Q FY27. Disbursements increased about 22 per cent year-on-year, although they declined approximately 10 per cent quarter-on-quarter to around Rs 296 billion. Vehicle finance disbursements rose about 21 per cent year-on-year.

Newer business lines accounted for around 22 per cent of disbursements, compared with approximately 21 per cent in the preceding quarter and 17 per cent a year earlier. Management reiterated its FY27 loan-growth guidance of about 20-23 per cent, supported by vehicle finance, MSME, consumer finance and gold loans, as well as demand, deeper penetration and market-share gains.

Management highlighted strong customer acquisition in MSME and consumer finance and sees cross-selling potential from the expanding customer base.

Asset Quality and Credit Costs

Sequential asset-quality deterioration remains the principal near-term concern. Gross Stage 3 and net Stage 3 increased by 25 basis points and 15 basis points quarter-on-quarter to 3.3 per cent and 1.8 per cent, respectively. Stage 2 plus Stage 3 loans, defined as loans that are 30 or more days past due, rose approximately 50 basis points to around 6 per cent.

Provision coverage on Stage 3 declined approximately 1.6 percentage points to about 45.7 per cent. Management attributed the deterioration to normal seasonality rather than portfolio stress. It reported no adverse impact from the monsoon or geopolitical conditions and retained its FY27 credit-cost guidance of around 1.5 per cent because of macroeconomic uncertainty.

The Rs 200 crore management overlay remains in place and will be reviewed at FY27-end. Motilal Oswal estimates credit costs of approximately 1.4 per cent for both FY27E and FY28E.

Margins, Gold Loans and Capital Position

Calculated net interest margin improved approximately 10 basis points quarter-on-quarter to around 7.1 per cent. Management expects FY27 funding costs to remain broadly stable, with any increase limited to 5-10 basis points. A better funding mix and access to bank funding are expected to support margins, while lending yields are expected to remain disciplined. Motilal Oswal forecasts NIM of 7.3 per cent in FY27E and 7.1 per cent in FY28E.

Gold-loan branches are scaling, with average branch AUM of Rs 12-15 crore. Management expects all branches opened in FY27 to become profitable in the following year and expects gold-loan yields of 16-17 per cent. CIFC plans to open 360 gold-loan branches in FY27.

Conversion of the remaining approximately Rs 430 crore of compulsory convertible debentures in October 2026 is expected to strengthen the company's capital position.

Forecasts and Key Investment Drivers

Motilal Oswal forecasts FY26-28E compound annual growth rates of approximately 20 per cent in disbursements, 21 per cent in AUM and 27 per cent in PAT. The broker forecasts FY28E return on assets of about 2.7 per cent and return on equity of approximately 20 per cent.

The positive investment thesis rests on CIFC's diversified portfolio, expanding customer reach, gold-loan scaling, operating leverage, benign credit-cost outlook and strong capital position.

Key Risks to the Investment Thesis

• Persistent pressure on asset quality.
• Higher-than-expected credit costs.
• Macroeconomic uncertainty.
• Pressure on funding costs and margins.