Vehicle finance firm in focus: Cholamandalam & Shriram Transport could give double-digit return

The fixed-rate lending nature of vehicle finance and depending up on the liabilities, borrowing and product mix, and the pricing power, the impact on margin can vary between 30 bps and 45 bps for different lenders in FY23.

A 140-165 bps increase (including the 90bp already announced in May-Jun’22) in policy repo rates is likely in FY23. Meanwhile, semiconductor shortages are expected to sustain, with supply-side issues unlikely to get fully resolved in FY23.

If fuel prices were to stay or moderate from current levels, we do not estimate any significant impact on vehicle demand or on repayments or collections. However, if fuel prices were to increase by 10%-15% from current levels, we expect higher delinquencies particularly in the CV-CE segment.

Commodity-price inflation is feeding into the higher ticket sizes of new and used vehicles. This will aid disbursement growth in FY23 as well.

Rising interest rates in isolation will not have a direct impact on demand for either passenger or commercial vehicles, but even a moderate slowing down of the economy has the potential to keep demand for new vehicle purchases muted.

Demand for commercial vehicles (CVs) has exhibited an improving trajectory for the last four-to-five months.

We expect the demand momentum to sustain in FY23, with higher capacity utilization from infrastructure spending feeding into the demand for newer vehicles.

In 1HFY23, lenders will endeavor to minimize the impact of higher borrowing costs by reducing excess liquidity and increasing the proportion of short-term borrowings (to the extent their ALM allows).

Asset quality for all three vehicle financiers –

(CIFC), M&M Financial Services (MMFS), and (SHTF) – exhibited a strong improvement, with NS3 for each one of them comfortably below 4% as of March 2022.

Write-offs were elevated, suggesting that repossessions and settlements were used more aggressively to affect the improvement in asset quality, even as the RBI NPA circular will become effective from October 2022.

We expect vehicle financiers to use the levers of operating and credit costs to deliver a healthy RoA, despite the expected compression in NIM.

We model an AUM CAGR of 21%/12%/11% and a PAT CAGR of 14%/26%/ 17% for CIFC/MMFS/SHTF over FY22-24. This will translate in a RoA of 2.6%/1.9%/2.3% and a RoE of 19%/9%/12 for CIFC/MMFS/SHTF in FY24E.

We maintain our preference for CIFC, followed by SHTF.

Cholamandalam Investment and Finance Company: Buy| Target Rs 780| Upside 19.6%
CIFC benefits from a well-diversified loan book, with newer business lines shaping up well. It will perhaps have more levers than its other peers to deliver a healthier RoA/RoE.

Strong asset quality has been CIFC’s hallmark. Its recent foray into SME and Consumer lending open up exciting new possibilities. It has partnered with various FinTechs for Consumer and Personal loans.

We firmly believe that CIFC will be able to scale up its capabilities in newer businesses and carve out its ‘Right to Win’ in these segments.

Shriram Transport Finance Company: Buy| Target Rs 1,450| LTP Rs 1266 as on 4 July| Upside 14.5%
SHTF witnessed early green shoots of new CV demand. The management said a new vehicle cycle has commenced, after being delayed due to geopolitical issues and higher crude prices. It expects a strong CV cycle over the next three years.

Higher ticket size (the price of new/used vehicles) will aid disbursement growth. Further, we believe that the merged entity will emerge stronger than the respective standalone businesses.

(The author is Head – Retail Research,


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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