Rating Rationale
June 22, 2018 | Mumbai
Cholamandalam Investment and Finance Company Limited
Rating upgraded to 'CRISIL AA+/Stable' 
 
Rating Action
Lower Tier II Bonds Aggregating Rs.200 Crore CRISIL AA+/Stable (Upgraded from 'CRISIL AA/Stable')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its long term rating on the Lower Tier II Bonds of Cholamandalam Investment and Finance Company Limited (Chola Finance) to 'CRISIL AA+/Stable' from 'CRISIL AA/Stable'.

The rating upgrade is mainly driven by the expectation of Chola Finance maintaining its healthy market position especially in its flagship commercial vehicle (CV) financing business. The upgrade also reflects continued improvement in the company's asset quality and financial risk profile. The rating continues to factor in the strong support from Murugappa Group, whose credit profile has also improved over time. The rating is partially offset by average credit quality of the loan against property (LAP) portfolio.

Key Rating Drivers & Detailed Description
Strengths
* Healthy market position in the vehicle finance segment
Chola Finance has sustained its strong market position in the vehicle financing segment which constitutes over two-thirds of its total financing business. Overall financing growth has been robust in the recent years, reporting a 5-year CAGR of 18%, with assets under management (AUM) increasing to Rs 43,435 crore as on March 31, 2018 (Rs 34,679 crore as on March 31, 2017).

CV financing business (comprises ~85% of the total vehicle financing business) will remain the flagship business for Chola Finance over the medium term. The company has an established track record in catering to customer segments such as small fleet transport operators and first-time users. The company's strong understanding of the borrower profile helps it provide customized offerings while appropriately factoring in the risks inherent in lending to the segment. The asset quality in the CV financing portfolio has also seen a marked improvement supported by strengthening of its collections and recovery processes and systems. Gross non-performing advances (NPA) ratio within the CV financing business declined to 2.0% as on March 31, 2018, as against 4.2% a year ago.

Chola Finance has also established a reasonable presence in the LAP business with an AUM of over Rs.10,000 crore (~24% of its total AUM). The company is also planning to increase its presence in the housing loans segment space which will provide diversity to its business profile over time.

* 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 53.07% in the company, through TI Financial Holdings Limited (46.21%) and other group entities. The group's credit profile has strengthened over time with increasing business diversity and improving debt protection metrics. The group has in the past demonstrated timely funding support to Chola Finance during weak liquidity conditions. It also infused equity capital of Rs.200 crore in March 2013. Chola Finance has been the Murugappa group's financial services arm for over two decades, is a key growth engine for the group and contributed to around 43% of the consolidated pre-tax profits of the Murugappa group in fiscal 2018. CRISIL believes that the group will maintain its majority equity stake in the company and continue to provide financial and managerial support whenever required.

Weakness
* Average credit quality in the LAP business
Delinquencies in the LAP portfolio for Chola Finance remain at elevated levels as reflected in the gross NPAs of 5.4% as on March 31, 2018. However, it has marginally improved from 5.8% as on March 31, 2017. The company is taking concrete efforts to address the credit quality challenges with higher focus on recoveries through enforcement of provisions of 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 asset quality while continuing to grow its portfolio in mortgage finance will remain a monitorable.
Outlook: Stable
CRISIL believes Chola Finance will continue to grow and maintain its strong market position in the vehicle financing segment, while maintaining asset quality over the medium term. The outlook may be revised to 'Positive' in case of an upward revision in CRISIL's view on the Murugappa group's credit risk profile, coupled with a significant improvement in Chola Finance's asset quality, capitalization and earnings. The outlook may be revised to 'Negative' in case of significant and sustained deterioration in the company's asset quality, profitability, or capitalisation, or a downward revision in CRISIL's view on the group's credit risk profile.
About the Company
Part of Chennai-based Murugappa group, Chola Finance was incorporated in 1978. The company mainly provides vehicle financing and LAP, along with home loans, MSME (micro, small and medium enterprises) and agri loans. Chola Finance had 873 branches across 27 states in India, with 79% presence across tier III and tier IV cities, as on March 31, 2018.

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 37.48% equity stake in Chola Finance to the Murugappa group. Chola Finance exited the unsecured personal loan segment in October 2008. It also exited its asset management business through a complete stake sale in DBS Chola Asset Management to L&T Finance Ltd in September 2009. The Murugappa group currently holds 53.1% equity stake in Chola Finance, of which 46.2% is held by TI Financial Holdings Limited, a group company.

Chola Finance  currently has three subsidiaries: Cholamandalam Securities Ltd (for stock broking and depository services), Cholamandalam Distribution Services Ltd (for fixed-income and insurance products) and White Data Systems India P Ltd. (freight aggregating business).

For fiscal 2018, Chola Finance reported a PAT of Rs 974 crore on a total income (net of interest expense) of Rs 3,118 crore, against a PAT of Rs 719 crore on a total income (net of interest expense) of Rs 2,429 crore for fiscal 2017.
Key Financial Indicators
As on/for the period ended March 31 Unit  2018 2017
Total Assets Rs crore 39,505 30,595
Total income Rs crore 5,426 4,660
Profit after tax Rs crore 974 719
Gross NPA % 2.9 4.7
Adjusted gearing Times 7.4 7.1
Return on managed assets % 2.4 2.1

Any other information
Chola Finance has a comfortable financial risk profile supported by improved earnings and stable capitalisation. Profitability has improved with profit-after tax (PAT) increasing by 35%YoY to Rs 974 crore for fiscal 2018 at the back of lower provisioning cost and higher operating income. Return on managed assets stood at 2.4% for fiscal 2018 (2.1% for fiscal 2017). Cost of borrowing for the company came down and stood at 8.5% as on March 31, 2018 (Mar'17: 9.2%, Mar'16: 9.7%). Operating efficiencies remained stable year-on-year.

Capitalisation remained comfortable and provided adequate cushion for asset-side risks; Tier I and overall capital adequacy ratio (CAR) stood at 13.2% and 18.4% respectively as on March 31, 2018 (13.6% and 18.6% respectively as on March 31, 2017). Adjusted gearing at 7.4 times is higher than the industry average but the company has demonstrated strong ability to raise capital when required. Networth coverage for net NPAs improved to 7.1 times as on March 31, 2018, from 3.9 times during the same period last fiscal.

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs. Cr) Rating Outstanding with Outlook
INE121A08MH1 Lower Tier-II Bond 07-May-12 11.75 07-May-19 100 CRISIL AA+/Stable
INE121A08MI9 Lower Tier-II Bond 18-May-12 11.70 17-May-19 50 CRISIL AA+/Stable
INE121A08MN9 Lower Tier-II Bond 05-Sep-12 11.25 05-Sep-18 25 CRISIL AA+/Stable
NA Lower Tier-II Bond* NA NA NA 25 CRISIL AA+/Stable
*Yet to be issued
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Lower Tier II Bonds  LT  175.00
31-03-18  		CRISIL AA+/Stable      27-10-17  CRISIL AA/Stable  11-11-16  CRISIL AA/Stable  19-06-15  CRISIL AA/Stable  CRISIL AA-/Positive 
Short Term Debt  ST    --    --  27-10-17  Withdrawal  11-11-16  CRISIL A1+  19-06-15  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Links to related criteria
Rating Criteria for Finance Companies
CRISILs Criteria for rating short term debt
Criteria for Notching up Stand Alone Ratings of Companies based on Group Support

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