New Lending Segments And Geographic Expansion Will Drive Efficiency

Key Takeaways

• Strategic expansion into home loans and LAP is expected to boost disbursements and revenue, enhancing market presence.
  
• Focusing on reducing credit costs and exiting low-return products is likely to improve net margins and drive long-term efficiency.
  
• Strategic shifts in disbursements and potential adverse conditions threaten revenue growth, net margins, and earnings despite new business initiatives requiring investment.

Catalysts

Operates as a non-banking finance company in India.

• The company is aiming for a 20% to 25% annual growth in assets under management (AUM), driven by increased disbursements in home loans, vehicle financing, and new business segments, which could positively impact revenue growth.
  
• The ongoing expansion into home and loan against property (LAP) businesses across newer geographies is expected to fuel higher disbursement volumes, potentially increasing revenue and improving market presence.
  
• There is a strategic focus on reducing credit costs by managing delinquencies in traditionally higher-risk segments like vehicle finance and SME, which is expected to enhance net margins by lowering overall costs.
  
• Launching new offerings such as gold loans and consumer durable loans, along with increasing branch efficiency, is expected to diversify revenue streams and stabilize earnings as these segments gain traction and contribute to overall growth.
  
• The company's efforts to progressively exit low-return products and partnerships, optimize branch productivity, and leverage technology in new ventures are anticipated to drive efficiency and improve operating margins over the medium to long term.

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 39.3% today to 33.7% in 3 years time.
• Analysts expect earnings to reach ₹82.4 billion (and earnings per share of ₹96.47) by about May 2028, up from ₹42.6 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹90.9 billion in earnings, and the most bearish expecting ₹73.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.4x on those 2028 earnings, down from 29.4x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.61%, as per the Simply Wall St company report.

Cholamandalam Investment and Finance Future Earnings Per Share Growth

Risks

• The company has made a conscious decision to reduce disbursements in lower ROTA (Return on Tangible Assets) products like supply chain finance, which might slow down revenue growth from these segments.
  
• The consumer and small enterprise segment is seeing drop in disbursements due to an exit from certain partnership-led volumes, potentially affecting revenue from this area and limiting scale.
  
• The CECL (Consumer, Education, and Conventional Lending) business credit costs have increased due to legacy fintech partnerships, impacting net margins and dragging earnings in the short term until these issues are resolved.
  
• The new initiatives, such as the gold loan business, could increase operational expenses in the short term and require significant investment, potentially impacting net margins until they stabilize and scale.
  
• Any impact of adverse monsoon conditions could affect the vehicle finance segment's performance, which is critical for maintaining their targeted AUM growth and could risk the revenue and earnings expectations if conditions aren't favorable.

Valuation

• The analysts have a consensus price target of ₹1608.853 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 ₹1950.0, and the most bearish reporting a price target of just ₹1085.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹244.2 billion, earnings will come to ₹82.4 billion, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 15.6%.
  
• Given the current share price of ₹1491.95, the analyst price target of ₹1608.85 is 7.3% 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.