Street shrugs off likely credit cost pain for Cholamandalam Investment

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

With a 14 per cent gain in August, so far, the stock of Cholamandalam Investment and Finance Company (Cholamandalam) has outperformed the 2.5 per cent rise in the Nifty Financial Services index. While the extension of the partial credit guarantee scheme (PCGS) by the government on Monday partly supported the stock, investors have taken a host of other factors into account. These include better-than-expected disbursements, some progress in moratorium repayment, and the management’s commentary, which asserted the Covid-19 credit cost (provisioning as a percentage of loan book) would not be excessive.

In the June 2020 quarter (Q1), Cholamandalam did not provide for Covid-19 as the management believed adequate provisions had already been made in the March 2020 quarter — 90 basis points of its assets under management (AUM). 

However, analysts said Cholamandalam would likely need to increase its credit cost, given the uncertain economic situation. Analysts at PhillipCapital said in their report that “the larger disappointment was on account of lower Covid-19-related provisioning". This was due to the collection trend in the moratorium book.

While 50 per cent of Cholamandalam’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 three or more instalments. The remaining 33 per cent have paid only up to one instalment. Therefore, the above-mentioned analysts were of the view that lower provisioning left the balance sheet vulnerable to sudden shocks. 

 

 

PhillipCapital has downgraded the stock to "neutral" after the Q1 results. Analysts at Equirus have also downgraded the stock to "add" from "long" because of a likely increase in slippages and credit cost.
 

Though the Reserve Bank of India (RBI) has allowed restructuring for Covid-19-led delinquencies, last week, to what extent it would soften lenders’ provisioning pain needs to be seen. This because 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 pain materially at least in the near term, given the minimum 10 per cent provisioning requirement under restructuring.

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, it surprised the Street with better-than-estimated disbursements (though they were down 58 per cent year-on-year, or YoY), which improved significantly in June and achieved 70 per cent of the year-ago levels. This was supported by the tractor and construction equipment segments.

The extension of the PCGS for three months, until November, offers some relief for the entire NBFC space. Lallitabh Srivastawa, deputy vice president at Sharekhan, said “The PCGS had seen good response earlier. So, we believe that the extension of the PCGS and the higher investment limit for AA/AA- rated bonds will take care of NBFCs’ funding requirement to some extent.”