Detailed Rationale

CRISIL Ratings has reaffirmed its 'CRISIL A1+' rating on the commercial paper of Cholamandalam Investment and Finance Company Limited (Chola Finance).

 

The rating continues to factor in the established market position of the company, especially in the vehicle financing segment, sustained profitability aided by sequential restoration in asset quality metrics, and strong support from the Murugappa group. These strengths are partially offset by moderate gearing and the ability to maintain adequate buffer in capitalisation metrics alongside growth.

 

With a 3-year compound annual growth rate of 24%, the assets under management (AUM) stood at Rs 1,33,794 crore on December 31, 2023 thereby making it a leading player in the Indian non-banking financial company (NBFC) sector with a sizable market share in the vehicle financing segment.

 

Over the years, the company has diversified into, and garnered moderate market presence in, other asset classes like loan against property (LAP), home loans, micro, small, and medium enterprises (MSME) lending, consumer finance and personal loans. Corresponding to this post pandemic portfolio growth, the asset quality metrics have restored to gross stage III (GS III) level of 2.82% as on December 31, 2023 as compared to 3.01% on March 31, 2023 and 4.37%, a year prior to that. This improvement was witnessed across product segments and, has aided the reduction in overall credit costs over the past few quarters. Resultantly, profitability has sustained with return on managed assets (RoMA) of 2.7% for fiscal 2023 and 2.4% for the first nine months of fiscal 2024, despite operating expenses remaining flat and a moderate compression in net interest margins (NIMs) due to higher incremental cost of funds.

 

During the nine months through December 2023, the company raised Rs 2,000 crore as equity capital and another Rs 2,000 crore as compulsorily convertible debentures (CCDs). Owing to capital accretion, Tier I and overall capital adequacy ratio (CAR) increased to 15.55% and 19.37%, respectively, as on December 31, 2023, from 14.78% and 17.13% on March 31, 2023. Gearing, however, remained moderate at 6.7 times as compared to 6.9 times, on the respective dates.

Analytical Approach

CRISIL Ratings has assessed the standalone credit risk profile of Chola Finance.

Key Rating Drivers & Detailed Description

Strengths:

Established market position, especially in the vehicle financing segment

Over the years, Chola Finance has established a strong market position within the NBFC sector catalysed by sustained growth in the vehicle financing portfolio and gradual diversification into newer business segments such as consumer and micro, small, and medium enterprises (MSME) loans [called Consumer and Small Enterprise Loan (CSEL)], secured business and personal loan (SBPL) and SME finance.

 

Overall disbursements grew by 87% in fiscal 2023 and 40% (year-on-year) during the nine months ended December 31, 2023, aided by better macroeconomic conditions and a lower base. This traction was witnessed across all product segments. Consequently, total AUM grew by 40% (year-on-year) to Rs 133,794 crore as on December 31, 2023 from Rs 106,498 crore as on March 31, 2023 (Rs 76,907 crore as on March 31, 2022). As one of the largest vehicle financier in the country, the company has a dominant market share in the new and used vehicle financing segment, which accounts for two-thirds of its overall AUM. As on December 31, 2023, the vehicle finance stood at Rs 79,640 crore comprising commercial vehicles (CVs; 44%), cars (16%), multiutility vehicles (13%); two-/three-wheelers (8%), construction equipment (8%), tractors (10%) and others. Furthermore 73% of the vehicle financing AUM constituted of new vehicles. Over the years, the company has developed expertise in catering to credit needs of small and medium-fleet transport operators and first-time users, which enables them to customise credit offerings while appropriately factoring in the inherent risks.

 

The company has also gained a sizeable presence in the loan against property (LAP) business, reflected in an AUM base of Rs 26,891 crore (20% of overall AUM) as on December 31, 2023 which marks a year-on-year growth of 34%. Within the housing loan segment as well, the company has registered a year-on-year growth of 66% to achieve an AUM of Rs 12,049 crore (9% of overall AUM) as on December 31, 2023. This diversification, supported by healthy demand prospects and branch expansion, imparts diversity to the overall portfolio which insulates the business from cyclical downturns in the vehicle industry.  

 

The company ventured into new segments within the consumer and micro, small, and medium enterprises (MSME) ecosystems, namely CSEL, SBPL and SME finance in the second half of fiscal 2022, has increased to around 11% of AUM as of December 31, 2023.

 

Over the medium to long term, traditional segments like vehicle finance will continue to account for the majority share in overall AUM with CV financing remaining the flagship product. However, gradual expansion into newer business segments like LAP, home loans and CSEL shall result in higher portfolio diversity over time.

 

Adequate earnings profile aided by sequential restoration in asset quality metrics

In the aftermath of the Covid-19 pandemic, liquidity challenges faced by the borrowers resulted in overall gross stage III (GS III) assets of Chola Finance peaking at 6.8% as on June 30, 2021 (4.0% as on March 31, 2021) vis-a-vis 3.3% as on June 30, 2020. With the receding impact of the pandemic and restoration in economic activity from July 2021, asset quality metrics improved subsequently with GS III reducing to 2.82% (gross non-performing assets [GNPAs][1] of 3.92%) as on December 31, 2023, from 3.01% (GNPAs of 4.63%) on March 31, 2023 and 4,37% on March 31, 2022. This improvement in delinquencies was a factor of improved collection efficiency and, was witnessed across segments. Restructured portfolio formed 1.45% of the overall AUM as on December 31, 2023.

 

In terms of segmental asset quality, GS III in the vehicle finance portfolio stood at 3.29% as on December 31, 2023, as compared to 3.20% on March 31, 2023 and 3.90%, a year prior. In the LAP portfolio, GS III was 3.03% on December 31, 2023, which though lower than 4.02% as on March 31, 2023, has further scope of improvement. In the CSEL portfolio, which is a relatively newer business segment, delinquencies have inched up marginally as a sizable pool herein has been originated through fintech partnerships. These loans are covered by first loss default guarantee (FLDG), which shall cover for the credit losses.

 

As asset quality has restored to pre-pandemic level, corresponding credit costs have also corrected from 1.9% in fiscal 2021 to 0.8% in fiscal 2023. Resultantly, overall earnings profile has remained comfortable with an RoMA of 2.7% for fiscal 2023 as compared to 2.6% for fiscal 2022, also supported by favourable interest rate cycles. However, with rising interest rate scenario during the current fiscal, company’s net interest margins (NIMs) have moderated to 6.2% for the first nine months of fiscal 2024 compared to 6.4% for 9MFY23 and operating expenses (as % of average of total managed assets), on the other hand, remained almost flat at 2.9% for the corresponding period of the previous fiscal (2.8% for fiscal 2023) on account of higher employee cost and branch expansions undertaken during the period. Consequently, annualised RoMA for the nine months ended December 31, 2024, was 2.4%.

 

Thus far, delinquencies within the new business segments have remained low owing to limited seasoning in portfolio. However, the ability of the company to profitably scale new businesses while maintaining sound asset quality in traditional segments like vehicle, will remain a key monitorable. CRISIL Ratings also takes note of the recent Reserve Bank of India circular for risk weights, and the potential increase in cost of funds stemming from it considering a higher proportion of bank funding in the company’s liability profile. As the company plans to pass on the incremental cost to the customers, NIMs shall sustain within the current range which, along with sustained operating expenses and credit costs, should allow the profitability to remain stable.

 

Continued benefit of association with the Murugappa group

Chola Finance continues to benefit from financial and management support from the Murugappa group, which holds majority equity stake of 51.6% in the company as on December 31, 2023 - through Cholamandalam Financial Holdings Ltd (45.5%) and other group entities. Over the years, the overall credit risk profile of the company has strengthened and in addition to it, the group has a track record of extending timely funding support to Chola Finance during weak liquidity conditions or other adverse macro developments. In fiscal 2020, the group infused Rs 300 crore in Chola Finance, thereby augmenting its capital. Chola Finance remains a critical component of the Murugappa group ecosystem, witnessed by its high contribution to the group’s consolidated revenues and overall market capitalisation. The group is likely to maintain its majority stake in the company and shall provide need-based financial and managerial support.

 

Weaknesses:

Moderate leverage level, ability to maintain adequate buffer in capitalisation metrics alongside growth remains critical

Overall capital-to-risk weighted assets ratio (CRAR) and Tier-1 CAR stood at 17.13% and 14.78%, respectively, as on March 31, 2023, declining from 19.62% and 16.49% a year ago, due to high growth in AUM during fiscal 2023. Subsequently, the company raised Rs 2,000 crore through equity infusion and another Rs 2,000 crore through CCDs via qualified institutional placements in the third quarter of fiscal 2024, which has revived these capitalisation metrics to an overall CRAR and Tier-1 CAR of 19.37% and 15.55%, respectively, as on December 31, 2023.

 

Chola Finance had an elevated adjusted gearing level of 6.9 times (reported gearing of 6.8 times) as on March 31, 2023, as compared to 6.1 times (5.9 times) a year ago. Even with the recent round of capital infusion, gearing remained high at 6.7 times as on December 31, 2023. While the company is an active issuer in the capital markets and has demonstrated track record for raising capital from there, its ability to maintain adequate buffer in reported capitalisation metrics remains critical.

[1]As per RBI’s revised methodology for recognition of NPAs as per circular dated November 12, 2021

Liquidity: Strong

The asset-liability management profile had positive cumulative gaps in all buckets as on December 31, 2023. The company had liquid cushion aggregating to Rs 9,867 crore in the form of cash and equivalent (Rs 7,677 crore) and unutilised bank lines (Rs 2,190 crore) as on December 31, 2023. Against this, it has debt obligation of Rs 13,843 crore for the three months through March 31,2 2024. Company has inflows of Rs 9,953 crore during the same period. The company raised around Rs 57,796 crore in fiscal 2023 and Rs 53,327 crore during the nine months ended December 31, 2023 (in the form of commercial paper, term loan, working capital demand loan and other instruments) at competitive rates.

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the 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, lending decisions may have a bearing on environment.

 

Chola Finance has maintained strong focus on strengthening various aspects of its ESG profile.

 

Key ESG highlights:

• The company, through its lending practices, is largely retail focused and enables financing to new-to-credit customers in semi-urban areas and strives to provide sustainable livelihood related financing products.
• ESG disclosures are evolving, and the company is in the process of strengthening disclosures over the medium term.
• It has taken adequate measures for conservation of energy and use of alternative sources of energy.
• Its governance structure is characterised with 60% of the board members being independent directors; investor grievances are handled by a dedicated stakeholder relationship committee.

 

There is growing importance of ESG among investors and lenders. The commitment of Chola Finance to ESG principles will play a key role in enhancing stakeholder confidence, given the sizeable share of its market borrowings in overall debt and access to both domestic and foreign capital markets.

Rating Sensitivity Factors

Downward Factors

• Significant and sustained deterioration in asset quality with GNPA increasing to, and remaining beyond 5%, leading to weakening in profitability
• Inability to maintain capitalisation metrics at healthy levels alongside scale up in business.

About the Company

Part of the Chennai-based Murugappa group, Chola Finance was incorporated in 1978. The company provides vehicle financing and LAP as well as home loans, MSME and agricultural loans. It has ventured into new businesses in the consumer and MSME ecosystems, namely CSEL, SBPL and SME finance in the second half of fiscal 2022. It had 1,309 branches across 29 states in India, with 90% presence across tier III to tier VI cities, as on December 31, 2023.

 

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 holds 51.6% equity stake in Chola Finance, of which 45.5% is held by Cholamandalam Financial Holdings Ltd, a group company.

 

Chola Finance  has two subsidiaries: Cholamandalam Securities Ltd and Cholamandalam Home Finance Ltd, a joint venture with Payswiff Technologies Pvt Ltd and three associates: White Data Systems India Pvt Ltd, Vishvakarma Payments Pvt Ltd and Paytail Commerce Pvt Ltd.

 

As on December 31, 2023, profit after tax (PAT) was Rs 2,364 crore on total income (net of interest expense) of Rs 7,073 crore, against Rs 1,813 crore and Rs 5,169 crore, respectively, for the corresponding period of the previous fiscal.

Any other information: Not Applicable