India's Rising Middle Class Will Fuel Lending Expansion

Key Takeaways

• Structural growth drivers, branch expansion, and digital investments are set to boost long-term revenue and operating leverage while lowering acquisition costs.
  
• Diversified lending portfolio and robust risk management enhance earnings stability and position the company for above-industry growth.
  
• Persistent asset quality stress, muted growth, and over-exposure to cyclical segments may constrain profitability, increase risk, and lead to volatile or disappointing earnings.

Catalysts

Operates as a non-banking finance company in India.

• The continued rapid expansion of India's middle class and rising rural incomes are set to materially increase demand for vehicle finance, home loans, and SME lending-Cholamandalam's principal business lines-providing a structural tailwind to the company's long-term revenue growth and loan book expansion.
  
• The company's aggressive branch network growth (including new gold loan branches and deep presence in Tier 3/4/5 towns), combined with investment in digital lending infrastructure and analytics, positions it to capitalize on broader digital and financial inclusion initiatives, likely reducing customer acquisition costs and supporting improved operating leverage (future net margin expansion).
  
• Portfolio diversification initiatives-entry into new segments such as SME, LAP, and consumer finance, and the ongoing wind-down of riskier fintech partnership books-improve risk-adjusted earnings quality and reduce cyclicality, enhancing earnings stability and protecting net interest margins over time.
  
• Declining system interest rates and a higher proportion of EBLR/MCLR-linked borrowings allow Cholamandalam to benefit disproportionately from monetary easing, leading to structurally lower funding costs and incremental improvement in net interest margins and ROA in the coming periods.
  
• Strong capital adequacy, active risk management, and close coordination with OEM partners enable the company to gain market share without compromising underwriting standards, positioning Cholamandalam to outpace industry growth and drive sustained revenue, AUM, and market share gains as cyclical headwinds ease.

Cholamandalam Investment and Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Cholamandalam Investment and Finance's revenue will grow by 31.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 39.2% today to 33.0% in 3 years time.
• Analysts expect earnings to reach ₹84.3 billion (and earnings per share of ₹101.28) by about August 2028, up from ₹44.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹72.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.0x on those 2028 earnings, down from 27.6x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 27.5x.
• Analysts expect the number of shares outstanding to grow by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.44%, as per the Simply Wall St company report.

Cholamandalam Investment and Finance Future Earnings Per Share Growth

Risks

• Persistent elevation in credit costs and asset quality stress, particularly in vehicle finance and unsecured segments, may be symptomatic of structural, not just seasonal, headwinds; this could impair net margins and constrain profitability if deterioration isn't reversed.
  
• Repeated reliance on expectations of a rebound from festival season, rural recovery, or supportive monsoon creates downside risk if macro improvements do not materialize; if rural demand or industrial activity remains tepid, revenue growth and AUM expansion could disappoint.
  
• Disbursement growth, especially in core segments like vehicle finance and home loans, was muted, and management has guided to the lower end of previous growth expectations (10-12% in some segments vs. prior 15%+ ambitions); this signals sustained topline pressure and potential revenue miss.
  
• Increasing competitive pressure in vehicle and SME lending, with peers showing stress in asset quality and margins, combined with Chola's push for market share even during weaker cycles, could result in adverse selection and ultimately higher NPLs, undermining future net interest margins and ROE.
  
• Structural over-exposure to cyclical rural/vehicle finance and slower diversification into new lending areas (like SME, gold loans) may leave the company vulnerable to sector downturns or regulatory tightening, risking uneven revenue streams and volatile earnings.

Valuation

• The analysts have a consensus price target of ₹1582.853 for Cholamandalam Investment and Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1880.0, and the most bearish reporting a price target of just ₹1200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹255.1 billion, earnings will come to ₹84.3 billion, and it would be trading on a PE ratio of 25.0x, assuming you use a discount rate of 16.4%.
• Given the current share price of ₹1461.05, the analyst price target of ₹1582.85 is 7.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.