| Cholamandalam Investment and Finance Company Limited | ||||
| Ratings reaffirmed at 'CRISIL AA+ / Stable / CRISIL A1+ ' | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its 'CRISIL AA+/Stable/CRISIL A1+' ratings on the debt instruments of Cholamandalam Investment and Finance Company Ltd (Chola Finance).
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Analytical Approach For arriving at the ratings, CRISIL Ratings has analysed the business and financial risk profiles of Chola Finance. CRISIL has also factored in the strong support that the company is likely to receive from the Murugappa group given the majority ownership by, and strategic importance to the Murugappa group. |
Key Rating Drivers & Detailed Description Strengths: * Healthy market position, especially in the vehicle finance segment Chola Finance has sustained its strong market position in the new and used vehicle financing segment, which constitutes over two-thirds of the total financing business. Disbursements grew by 36% for fiscal 2022 and further rose by 267% year-on-year for the quarter ended June 30, 2022, aided by better macroeconomic conditions and a lower base. Consequently, assets under management (AUM) grew by 21% year-on-year for quarter ended June 30, 2022 and stood at Rs 81,925 crore as on June 30, 2022 (Rs 76,907 crore as on March 31, 2022, Rs 69,996 crore as on March 31, 2021).
The vehicle finance book, as on June 30, 2022 comprised commercial vehicles (CVs; 48%), cars (14%), multi-utility vehicles (11%); two/three wheelers (6%), construction equipment (8%) and tractors (12%) and others. Further, financing of new vehicles accounted for more than 71% of the AUM.
CV financing will remain the flagship within the vehicle finance business over the medium term. The company has an established track record of catering to small and medium fleet transport operators and first-time users. A strong understanding of the borrower profile helps provide customised offerings while appropriately factoring in the risk inherent in lending to the segment.
The company has also sizable presence in the loans against property (LAP) business with AUM of over Rs 18,116 crore (around 22% of the total AUM) as on June 30, 2022. It is also planning to increase its presence in the housing loans segment (loan book of Rs 5,497 crore as on June 30, 2022), so as to improve diversity of the end-user profile.
The company has ventured into new segments within the consumer and micro, small, and medium enterprises (MSME) ecosystem, namely Consumer and Small Enterprise Loan (CSEL), Secured Business and Personal Loan (SBPL) and SME finance in second half of fiscal 2022. Traditional segments will have a larger share in overall AUM, however ability to scale up the new business successfully will be a key monitorable in the medium term.
Chola Finance has entered into strategic partnerships with fintech platforms which will enable them to participate in fintech space. The company has also invested in Payswiff Technologies Pvt Ltd (Payswiff), which provides solutions for e-commerce businesses and also enables online payment gateway services. These digital initiatives will lend a competitive advantage to Chola Finance.
* Strong expectation of support from the Murugappa group Chola Finance continues to derive significant equity and management support from the Murugappa group, which holds a majority equity stake of 51.6% in the company through Cholamandalam Financial Holdings Ltd (45.5%) and other group entities. The overall credit risk profile has strengthened due to increasing business diversity and better debt protection metrics. The group has extended timely funding support to Chola Finance during weak liquidity conditions in the past. In fiscal 2020, the group infused Rs 300 crore in Chola Finance, thereby augmenting its capital levels. For over two decades, Chola Finance has been the Murugappa group’s arm in the financial services domain, which is a key growth engine, and has contributed to around 40% of the consolidated net profit in fiscal 2022. The group is likely to maintain its majority equity stake in the company and shall provide financial and managerial support as and when required.
Weakness: * Average, albeit improving, asset quality Asset quality of the portfolio remained under pressure because of the Covid-19 pandemic and its impact on the underlying cash flows of borrowers. In line with the trend, the overall Gross stage III (GS III) of Chola Finance peaked to 6.8% as on June 30, 2021 (4.0% as on March 31, 2021) vis-à-vis 3.3% as on June 30, 2020.
While impact of the pandemic is seen waning, and economic activity has picked up since July 2021, asset quality metrics have improved in subsequent quarters with GS III progressively reducing to 4.2% as on June 30, 2022, as compared to 4.4% as on March 31, 2022 (4.0% as on March 31, 2021). The improvement in delinquency is visible across segments. This is further supported by strong collection efficiency from the second half of fiscal 2022. Around 4.2% of AUM was restructured as on June 30, 2022; the performance of this portfolio needs to be seen.
GNPA stood at 6.3% as on June 30,2022 as against 6.8% as on March 31, 2022 as per the RBI’s revised methodology for recognition of NPA as per circular dated November 12, 2021. Reported asset quality metrics in new unsecured business remains lower on account of nascent stage of operations, however ability to manage asset quality with scale up of operations will remain key monitorable.
Delinquencies in the LAP portfolio remain high as reflected in the GS III of 6.5% as on June 30, 2022 (8.9% as on June 30, 2021). The company is taking concrete efforts to address credit quality challenges with higher focus on recoveries through enforcement of provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) and repossession of properties in case of wilful defaults.
The company’s ability to improve collections, recoveries and therefore asset quality will remain a monitorable. |
Liquidity: Strong The asset-liability management profile as on June 30, 2022, had positive cumulative gaps for all buckets. The company had liquidity cushion aggregating to Rs 11,477 crore in the form of cash & cash equivalents (Rs 4,916 crore) and unutilised bank lines (Rs 6,561 crore) as on June 30, 2022. Against this, it has upcoming repayment of around Rs 10,438 crore for the next three months till September 30, 2022. In terms of fund raising, the company has raised around Rs 32,915 crore during fiscal 2022 and Rs 12,214 crore during first quarter of fiscal 2023 (in the form of commercial papers, term loans, Working Capital Demand Loan and other instruments) at competitive rates.
Environment, Social, and Governance (ESG) profile CRISIL Ratings believes that Environment, Social, and Governance (ESG) profile of Chola Finance supports its already strong credit risk profile.
The ESG profile for financial sector entities typically factors in governance as a key differentiator. The sector has reasonable social impact because of its substantial employee and customer base, and it can play a key role in promoting financial inclusion. While the sector does not have a direct adverse environmental impact, the lending decisions may have a bearing on environment.
Chola Finance has maintained strong focus on strengthening various aspects of its ESG profile.
Chola Finance’s key ESG Highlights:
There is growing importance of ESG among investors and lenders. Chola Finance’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in the overall debt and access to both domestic and foreign capital markets. |
Outlook Stable CRISIL Ratings believes Chola Finance will continue to grow and maintain its strong market position, especially in the vehicle financing segment, while maintaining asset quality over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Part of the Chennai-based Murugappa group, Chola Finance was incorporated in 1978. The company mainly provides vehicle financing and LAP, along with home loans, MSME and agricultural loans. The company has ventured into new businesses in the consumer and MSME ecosysytem, namely CSEL, SBPL and SME finance in the second half of fiscal 2022. It had 1,148 branches across 29 states in India, with 80% presence across tier III to tier VI cities, as on June 30, 2022.
Between April 2005 and March 2010, the company operated as a joint venture between DBS Bank and the Murugappa group. In March 2010, DBS Bank sold its 37.5% equity stake to the Murugappa group. Chola Finance exited the unsecured personal loan segment in October 2008 and subsequently from the asset management business The Murugappa group currently holds 51.6% equity stake in Chola Finance, of which 45.5% is held by Cholamandalam Financial Holdings Limited, a group company.
Chola Finance currently has two subsidiaries: Cholamandalam Securities Ltd (CSEC) and Cholamandalam Home Finance Ltd (CHFL), joint venture with Payswiff Technologies Pvt Ltd and three associates: White Data System India Pvt Ltd, Vishvakarma Payments Pvt Ltd and Paytail Commerce Pvt Ltd.
For the quarter ending June 30, 2022, profit after tax (PAT) was Rs 566 crore on total income (net of interest expense) of Rs 1,640 crore, against Rs 327 crore and Rs 1,374 crore, respectively, for the corresponding period of fiscal 2022. |
Key Financial Indicators
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Any other information: The financial risk profile is comfortable, supported by earnings and stable capitalisation. Profitability in fiscal 2022 improved with PAT of Rs 2,017 crore, mainly due to growth in AUM and controlled credit cost. Overall, return on managed assets was around 2.7% for fiscal 2022 as compared to 2.2% for fiscal 2021.
Tier I and overall capital adequacy ratios stood at 16.5% and 19.6%, respectively, as on March 31, 2022 (15.1% and 19.1% respectively, as on March 31, 2021). The company reported networth of Rs 11,708 crore as on March 31, 2022. Adjusted gearing levels was stable at 6.0 times as on March 31, 2022. |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Yet to be issued |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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