Cholamandalam Investment and Finance Company Ltd Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Avinash Singh - Emkay Global - Analyst : Yes, good morning. Thanks for the opportunity and congratulations to Mr. Kundu for his elevation to the position of MD. A couple of questions. The first one, if you can help us understand, if we see -- I mean, the PCR in LAP and SME segment, you have taken down materially. So what is driving this sort of -- what gives you, in this quarter, particularly, where you see some kind of rise in delinquencies and also, I mean, so the PCR [reduction] in these 2 segments or the LAP and SME material, what is driving that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 29, 2024 / 4:30AM, CHLA.NS - Q1 2025 Cholamandalam Investment and Finance Company Ltd Earnings Call And the ECL in [this thing] vehicle seems to be inching up, I mean, of course, the Q4 to Q1 is typically seasonality, but even -- I mean, if I take kind of on longer-term trend also there's a jump. So this bit if you can clarify? Second yield in the vehicle segment seems to be sort of had come off. Is it because of some mix of vehicles that had changed in Europe this quarter or something else? Thanks. Unidentified Company Representative Yes. I'll address the ECL part or LAP Financial In both these segments, what is happening is we have been resolving a lot of these old cases which were running with much higher provisioning percentages. And that's what you saw over the period that the solutions have come down, and we have been able to resolve them. So as this book runs off, that is there are old cases with higher provisioning [trends] off, you will see that the provision coverage seemingly coming down. But basically, the LGDs are very, very low, actually, and we are still following a percentage which is not even as per [LGDs] given as per the trend of this portfolio, but more -- much higher than the numbers which we need to adopt. So this is the status and we are comfortable with PCR purchase. Ravi, do you want to talk on that?

Question: Avinash Singh - Emkay Global - Analyst : Got it. Thank you.

Question: Raghav Garg - Ambit Capital - Analyst : Hi. Thanks for the opportunity. Just to have a bit more on the credit cost for the Vehicle Finance business. So if you compare it to last year, there is still an increase and the OpEx ratio for the Vehicle Finance business have also increased. What's leading to this increase? Especially when I noticed that your disbursements have been higher for the larger ticket size vehicles because I would assume if that's the case then the asset base is larger, and at the margin, the OpEx ratio should not increase as much. Some color on that. That's my first question.

Question: Raghav Garg - Ambit Capital - Analyst : Understood. And sir, my second question is on the Home Loan business, sir. And I see that the number of branches that are there, the incremental addition has been coming down over the last 3, 4 quarters. And essentially, that was one of the things that was driving the disbursements growth also for us in the Home Loan business. So now as the branch addition has slowed down quite materially, does this mean that you have penetrated in terms of distribution fairly well, and it will be a more stable and established state growth run rate on the disbursements front from here on?

Question: Raghav Garg - Ambit Capital - Analyst : And this ramp-up in volumes will be led by the addition or (multiple speakers) -- ? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 29, 2024 / 4:30AM, CHLA.NS - Q1 2025 Cholamandalam Investment and Finance Company Ltd Earnings Call Unidentified Company Representative Also, we are going to -- we have also introduced one more project in terms of going more rural. So that will help us to increase our numbers, penetrating more into rural market.

Question: Raghav Garg - Ambit Capital - Analyst : [Ticker price also will be in similar level?]

Question: Raghav Garg - Ambit Capital - Analyst : Do I have time for one more question? Unidentified Company Representative Go ahead, go ahead.

Question: Raghav Garg - Ambit Capital - Analyst : Sir, your write-off at INR320 crores right, versus INR200 crores last year? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 29, 2024 / 4:30AM, CHLA.NS - Q1 2025 Cholamandalam Investment and Finance Company Ltd Earnings Call

Question: Raghav Garg - Ambit Capital - Analyst : Right. But sir, at the same time, your AUM has also increased. So mathematically that is bound to come down. But if I look at write-offs as a percentage of opening NPAs, then it's fairly elevated compared to last many quarters. So that's the reason why I asked. Unidentified Company Representative So in CSEL, for example, last year, we started doing write-off and recognizing FLDG not in Q1, but subsequently. So that difference will keep coming until you come to the same level of representation happening in both sides.

Question: Abhijit Tibrewal - Motilal Oswal Financial Services Ltd - Analyst : Yes. Thank you and good morning, everyone, and congratulations, Ravi sir. My first question is for you. How should we look at OpEx not just in the near term but slightly, I mean, over the next 2, 3 years, why I ask this is, I mean, we have lead out new businesses, which are doing well. And I'm sure, I mean, they are in the investment mode. Just trying to understand over the next 2, 3 years, I mean, then maybe you'll kind of look at a few more product lines. By when can we expect this investment mode to get over and we kind of transition to a productivity -- improvement in productivity, as to say?

Question: Abhijit Tibrewal - Motilal Oswal Financial Services Ltd - Analyst : Okay. Ravi sir, I mean, is it fair to say that maybe in another 2 years' time, we should even start seeing an improvement in our ROA profile, PBT-ROA profile, not just some margin expansion but also from improvements in OpEx?

Question: Abhijit Tibrewal - Motilal Oswal Financial Services Ltd - Analyst : Sir. And my last question is for Arul sir. More near term, I mean, cost of borrowings seem like stabilizing now while there is tech narrative of a rate cut now kind of building in, in the second half of this calendar or fiscal year. Just wanted to understand how have we positioned ourselves on the bank of borrowing side particularly in terms of our MCLR borrowings. I mean, are we positioned in such a way that whenever the rate cuts are there, it will start benefiting us quicker than maybe some others? Unidentified Company Representative Our bank borrowings are predominantly driven by priority sector on lendings by line. And here, we try to do benchmarking with the T-Bill or any of the benchmark [indices] because the MCLR rate is higher. So if the liquidity position improves and T-Bill rates come off, then we should see the benefit. We are seeing that already in [part of] portfolio where it has been benchmarked (inaudible). Of course, public sector banks, we do with MCLR. There, we are still seeing some increase happening in MCLR, but that is something we need to manage between these 2 to get the overall rate steady at the current level.

Question: Abhijit Tibrewal - Motilal Oswal Financial Services Ltd - Analyst : Yes, sir. This is very [comforting]. Thank you, so much and all the very best to you.

Question: Shweta Daptardar - Elara Capital - Analyst : Thank you so much.

Question: Viral Shah - IIFL Capital - Analyst : Hi. Thank you for the opportunity. I have a few questions. So one, in terms of the credit cost. So while we have a changing book mix, which is there, I would say that from a medium-term perspective, your credit cost could be a bit higher. But do we see also the fact that the recoveries in the home loans and LAP piece now that, that will moderate your credit cost, where will it kind of say not for this year, but say, '26, '27, where it would kind of shuttle on a BAU basis.

Question: Viral Shah - IIFL Capital - Analyst : So then, my question is that while you're in Home Loans and LAPs, there will be a bit of upside from where we were in FY24. Plus, of course, the new businesses, they are -- even despite the higher credit costs, they are still ROA-accretive. So where is the kind of normalized credit cost status? Will it be like 140 basis points levels? And I'm not asking for FY25, but more like, say, '26, '27, how one should look at it?

Question: Viral Shah - IIFL Capital - Analyst : Okay. You're saying the total credit cost, right? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 29, 2024 / 4:30AM, CHLA.NS - Q1 2025 Cholamandalam Investment and Finance Company Ltd Earnings Call

Question: Viral Shah - IIFL Capital - Analyst : Got it. Sir, the next question is in case of the new businesses, right, as you mentioned that we have seen, of course, improvement in our profitability, both driven by OpEx moderation as well as NIM expansion. And consequently, our ROAs have kind of improved, what further scope were there in these new businesses is there, say, in terms of further improvement in profitability?

Question: Viral Shah - IIFL Capital - Analyst : Okay. And in terms of the book mix, now we are at 13% of the new businesses, where should we settle, say, two years out seeing FY26?

Question: Viral Shah - IIFL Capital - Analyst : 15%.

Question: Viral Shah - IIFL Capital - Analyst : Sorry, can we just repeat the last piece?

Question: Viral Shah - IIFL Capital - Analyst : Got it. And finally, the overall growth. Last quarter, you had mentioned the disbursement growth to be in the range of 20%, 25% for this year. Now are we seeing that a bit lower and lower than that in this year?

Question: Viral Shah - IIFL Capital - Analyst : Got it. So basically, we're confident of 20%, 25% kind of disbursement growth and 25% to 30% AUM growth for this year?

Question: Viral Shah - IIFL Capital - Analyst : Got it, sir. Thank you and all.

Question: Kunal Shah - Citigroup - Analyst : Yes, hi. Congratulations Kundu sir. So again, touching upon this growth. In fact, when we look at it, the traction, as you mentioned on the disbursement side, is better than what you expected plus almost like 8% sequential growth in a seasonally weak quarter. Doesn't it give the confidence to be like relatively higher on the AUM growth, they are just -- seem to be slightly conservative with this 25%, 30%? Or you are clearly seeing that in some segments, you would tend to pull back on the growth, if any asset quality issues come up?

Question: Kunal Shah - Citigroup - Analyst : Okay. Okay. But otherwise, there is nothing because in terms of credit cost, also, you are confident that it will come off, okay, maybe at least yields will also improve. So that is nothing which worries us on the growth side, considering the traction which has been there on the Q1. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 29, 2024 / 4:30AM, CHLA.NS - Q1 2025 Cholamandalam Investment and Finance Company Ltd Earnings Call

Question: Kunal Shah - Citigroup - Analyst : Okay. Okay. And secondly, in terms of the OpEx, so again, you indicated how it would pan out. But just like in 1Q, it's been quite low across the product segments. So when we look at it, in fact, is there a revision maybe you indicated that you will keep on investing into the branches and the manpower. But compared to what we have been highlighting earlier in terms of where it should settle, now given the growth trajectory, is it giving us the confidence that OpEx to assets may be at a relatively lower level, maybe mainly because of the a denominator effect or maybe whatever we are seeing positive surprise on the denominator will get offset by the increase in the OpEx as well?

Question: Kunal Shah - Citigroup - Analyst : Okay, sure. And one last question in terms of the positioning in the vehicle segments. So when we look at it in terms of the disbursements, particularly in the used, it's still been like steady, somewhere closer to 32, 33-odd-percent, would we be seeing in terms of the increase in this maybe given that most of the players are highlighting that there is a huge demand as well as increase in the prices as well for the used vehicle. Do we see that proportion inching up?

Question: Kunal Shah - Citigroup - Analyst : Yes. But otherwise, disbursements might continue because you still want to make it slightly more broad-based growth?

Question: Kunal Shah - Citigroup - Analyst : Okay. Thank you all the best.

Question: Bharat Shah - ASK Investment Managers Limited. - Analyst : Raviji, hearty congratulation, this elevation was waiting for a while and most deserving part.

Question: Bharat Shah - ASK Investment Managers Limited. - Analyst : Absolutely. I just wanted to understand the sense of the destiny. If I look at the past, Chola, if I had to describe it as Chola 1.0, was more about decent ROE, good enough ROE and reasonable growth while keeping quality and other parameters impeccable, given the context of the verticals that we finance. Chola 2.0 of the recent period, which is still, I think, is going on, is more about enhanced growth rate. While ensuring that our quality and capital efficiency parameters don't suffer. In fact, our effort, is it does -- it appears, subject to OpEx is to enhance that. Now you have talked about moderation of expenses and operating leverage kicking in, so given the effect of (inaudible) happening in some time, given the fact that in any case, we have always remained focused on quality of the assets and the emphasis on the capital efficiency, both ROA and ROE. What kind of -- in the 3 to 5 years sustainable growth you would think you need to have and you target to have? Unidentified Company Representative Bharat Bhai, this is Vellayan. So Bharat Bhai, I think kind of like you said, there has been a shift. But obviously, one of the reasons we made the shift and added the new businesses was to add more growth sectors. So even if you see disbursement growth that's happened, Vehicle Finance has been a bit lower, but the overall company disbursement growth has not changed. So basically, the mix is changing at two levels. The mix of the overall level is changing because of the new businesses. And the mix within Vehicle Finance is changing as we basically move, like we said, more towards used and products like that. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JULY 29, 2024 / 4:30AM, CHLA.NS - Q1 2025 Cholamandalam Investment and Finance Company Ltd Earnings Call Some of these products tend to be more intensive operationally and hence, the shift in operating expenses also. If we take a five-year view, we see no reason, if we look at the macro in India, to be able to continue to grow at this stage. So basically, the -- and if you ask kind of broadly the engine is designed to perform at that rate now kind of. So each of the businesses kind of individually make their adjustments and fixes. So I do believe that this growth rate is sustainable over that period. Obviously, in any business, especially in kind of some of ours like Vehicle, we are going to have cycles, and we will have to we usually take a five-year period in around a five- to six-year period, you tend to have 1 down cycle. So that will be to be expected. But otherwise, I would think that growth rates can be sustained. It is an intentional shift. And always, we kind of work around those parameters to say, what does it take to achieve that median of about 3.5% ROA that kind of swings depending on the interest rate environment and NCL performance, it goes down a bit, down to the 3.1%, 3.2% levels and then goes up as high as 3.8%. So that will continue to be the performance band in which we continue to operate. I don't know if that answers your question, Bharat.

Question: Bharat Shah - ASK Investment Managers Limited. - Analyst : And which means, there will be at least one instance of capital dilution in five years because our growth rate obviously will exceed the return on equity and at some amount of dilution, it will call for it, we aim to grow at 30% over 5 years. Unidentified Company Representative Yes, you're correct.

Question: Pranuj Shah - JP Morgan - Analyst : Hi, thank you for the opportunity. Sir Kundu, one question I had on your branch expansion, it has been pretty fast over the last couple of years. And especially, I think in other sectors, you look at the performance in Vehicle Finance but in Vehicle Finance, in particular, before expanding, what the parameters that you look in a particular market or a district for setting up (inaudible) over there? And my second question is just on the CSEL disbursement, the mix between the unsecured business loan and unsecured consumer loans?

Question: Pranuj Shah - JP Morgan - Analyst : Understood. On the CSEL part?

Question: Pranuj Shah - JP Morgan - Analyst : Understood. Got it. Thank you.

Question: Shubhranshu Mishra - Phillip Capital - Analyst : Hi, thanks for the opportunity. Congratulations, Kundu sir. I have two questions. First one is the [when you said] that we are speaking about a 25%, 30% growth. Our focus would be majorly on higher ticket items, especially Vehicle Finance because that is what will propel growth at those levels. Is that a fair understanding? Also, is there an infinite market for used vehicles because almost everyone is doing that, like we have our NBFC competitors that are small finance clients, there are certain banks, which are also entering. So what is the total market size according to our estimates and where are we in the market share? And where do you think that we would be in market share? And just one last data keeping question. What were the number of loans that we did in Vehicle Finance this quarter versus 1 year ago?

Question: Shubhranshu Mishra - Phillip Capital - Analyst : The total number of loans that we -- that this quarter was INR2.65 lakhs.

Question: Shubhranshu Mishra - Phillip Capital - Analyst : And what is our market share in (inaudible)? That is one question.

Question: Shubhranshu Mishra - Phillip Capital - Analyst : But maybe what is the total market size if we don't have a market share. So we would be doing some kind of math to understand that, okay, this is going to contribute to our growth, right?

Question: Shubhranshu Mishra - Phillip Capital - Analyst : Got it, sir. Sure, I'll take that off-line, sir. Thank you so much and best of luck for the future quarters.

Question: Sanket Chheda - DAM Capital - Analyst : Yes, hi, sir. Congrats on a good set of numbers and pretty much congratulations to Kundu sir, very well deserved. My question was to just a comment that you alluded that 25%, 30% CAGR is what do you intend to do. And you mentioned 4% ROA target. (inaudible) by when you think we would be --.

Question: Sanket Chheda - DAM Capital - Analyst : Okay. Sure, sir. And the credit cost guidance stays at 1.2%, right?

Question: Sanket Chheda - DAM Capital - Analyst : So then it's fair to assume that debt would be pulled back in second half.

Question: Sanket Chheda - DAM Capital - Analyst : Sure, sir. Thanks. Those were my questions.

Question: Bunty Chawla - IDBI Capital - Analyst : Thank you, sir. Thank you for giving me the opportunity and congratulations, Ravi, sir. My question has been answered. Just a data point, if you can share write-offs for this quarter.

Question: Bunty Chawla - IDBI Capital - Analyst : Sorry, sir --

Question: Bunty Chawla - IDBI Capital - Analyst : INR322 crores, Q1 FY25. And a similar number for the last year, Q1 FY24? Unidentified Company Representative INR204 crores.

Question: Nischint Chawathe - Kotak Securities - Analyst : Hi. Thanks for taking my question. This is actually on Vehicle Finance. I'm just trying to understand as to how do you see the growth going forward for this segment? I believe most of the auto analysts are sort of having very muted or moderate growth expectations this year and specifically, the tailwind that was enjoyed by the sector in the last two years because of the vehicle prices going up, I believe some of the companies are probably expecting some discounts as well. So in the backdrop of this, which segment of Vehicle Finance probably grow this year? And what are you really stepping up? And in that sense, how does it change your overall yield profile.

Question: Nischint Chawathe - Kotak Securities - Analyst : And in that sense, the increase that we saw in FCVs this quarter could be sort of more transitionary and next quarter onwards when you see the other businesses or the share of other businesses and disbursement increasing?

Question: Nischint Chawathe - Kotak Securities - Analyst : But do you see that base effect continuing in the next three quarters?

Question: Nischint Chawathe - Kotak Securities - Analyst : Sure. My second question is actually on business loans. And we have seen some signs of stress in unsecured loans with some of the lenders and typically, there is a concern that this kind of marks into stress for some of the other segments. So are we seeing any increase in pump rates or anything that kind of -- flags in these segments, which probably be sort of change business or shift business segments in this particular product? Unidentified Company Representative See, as far as the business loans in the quarter one, there was -- the industry-wise, there was a spike in the month of April, and that is basically because of the election, too many holidays and all those things. But if you look at the industry-wise trend and what we have done, our bonds rates are still sub 10%. Our family bonds rates are better than the previous quarters. And we have not seen any major spikes in our portfolio behavior. Yes, this book is around 30 to 33 months only. So during the course of maturing, we will see a slight movement up down, but that as such, Nischint, we are not seeing much of any abnormal behavior or the kind of things -- the news which is spreading in the market, that kind of behavior, we have not seen in the quarter one.

Question: Nischint Chawathe - Kotak Securities - Analyst : Sure. Got it. This was actually the last question for the call today. Thank you participants for joining us today. And thank you very much, the management of Chola for giving Kotak, an opportunity to host this call. Thank you very much.