Cholamandalam Investment and Finance Company Limited (NSE:CHOLAFIN): Can Growth Justify Its May Share Price?

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Growth expectations for Cholamandalam Investment and Finance Company Limited (NSE:CHOLAFIN) are high, but many investors are starting to ask whether its last close at ₹1495.95 can still be rationalized by the future potential. Below I will be talking through a basic metric which will help answer this question.

Check out our latest analysis for Cholamandalam Investment and Finance

Has the CHOLAFIN train has slowed down?

Analysts are predicting good growth prospects for Cholamandalam Investment and Finance over the next couple of years. Expectations from 15 analysts are buoyant with earnings per share estimated to surge from current levels of ₹76.56 to ₹117.776 over the next three years. This indicates an estimated earnings growth rate of 14% per year, on average, which illustrates an optimistic outlook in the near term.

Can CHOLAFIN’s share price be justified by its earnings growth?

Cholamandalam Investment and Finance is available at price-to-earnings ratio of 19.69x, showing us it is undervalued based on its latest annual earnings update compared to the Consumer Finance average of 20.01x , and overvalued compared to the IN market average ratio of 16.08x .

NSEI:CHOLAFIN Price Estimation Relative to Market, May 29th 2019
NSEI:CHOLAFIN Price Estimation Relative to Market, May 29th 2019

Cholamandalam Investment and Finance’s price-to-earnings ratio stands at 19.69x, which is low, relative to the industry average. This already suggests that the stock could be undervalued. However, to properly examine the value of a high-growth stock such as Cholamandalam Investment and Finance, we must reflect its earnings growth into the valuation. I find that the PEG ratio is simple yet effective for this exercise. A PE ratio of 19.69x and expected year-on-year earnings growth of 14% give Cholamandalam Investment and Finance a higher PEG ratio of 1.42x. So, when we include the growth factor in our analysis, Cholamandalam Investment and Finance appears slightly overvalued , based on the fundamentals.

What this means for you:

CHOLAFIN’s current overvaluation could signal a potential selling opportunity to reduce your exposure to the stock, or it you’re a potential investor, now may not be the right time to buy. However, basing your investment decision off one metric alone is certainly not sufficient. There are many things I have not taken into account in this article and the PEG ratio is very one-dimensional. If you have not done so already, I urge you to complete your research by taking a look at the following:

  1. Financial Health: Are CHOLAFIN’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.
  2. Past Track Record: Has CHOLAFIN been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of CHOLAFIN’s historicals for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.