Cholamandalam Investment - Strong Franchise But Diminishing Margin Of Safety: HDFC Securities

HDFC Securities Institutional Equities

Cholamandalam Investment and Finance Company Ltd. exposure to unsecured retail credit through FinTech partnerships is low (~1.8% of assets under management as of September-2023) and poses limited downside risk on account of the underlying customer profile and partnership dynamics. Chola’s core businesses (vehicle, loan against property and home loans) have delivered steady outcomes on growth as well as profitability parameters.

With an increasingly diversified portfolio, we expect Cholamandalam to deliver steady loan growth (greater then 20%) and profitability (return on equity of greater then 20%) in the medium-term, with the recent equity raise to support loan growth.

However, having outperformed Bank Nifty by 60% during CY23, we believe that current valuations (5.1 times March-25 adjusted book value per share) offer limited margin of safety.

We downgrade Cholamandalam from 'Buy' to 'Add' with a revised RI-based target price of Rs 1280 (earlier Rs 1315) implying 4.6 times September-2025 adjusted book value per share (~15% discount to Bajaj Finance Ltd.). We factor in AUM compound annual growth rate of ~24% during FY23-FY26.

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