Aniket Pujari
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The US Federal Reserve has cut interest rates by 50 basis points for the first time since 2020, paving the way for global monetary policy easing, including India. According to Macquarie, the biggest beneficiary of interest rate cuts within the banking, financial services and insurance space could be non-banking financial companies or NBFCs.
Also, after Bajaj Housing Finance Ltd’s stellar listing, NBFCs are in the limelight. A case in point is Cholamandalam Investment and Finance Co. Ltd, shares of which hit a new 52-week high of ₹1,614 on Thursday.
Cholamandalam has created a staggering 16x wealth for shareholders over the last decade by getting the combination of asset yield and corresponding risk right. While its net income to assets has been above 7.5% for the last three years to FY24, the credit cost or cost of bad loans has been around 1%.
The company has set a target of RoA of 3.5% (based on pre-tax earnings) on a sustainable basis over the next few years versus 3.2% seen in the first quarter of FY25. Sharekhan is yet to factor in likely gains from the expected softening of interest rates. Generally, a change in interest rate for a company with assets and liability, both on a fixed or a floating rate, should have minimum impact on interest spread.
However, Cholamandalam has a higher proportion of borrowings on floating rates, linked to treasury bill and other external benchmarks, and a higher share of fixed rate vehicle book. Term loans account for 46% of the total borrowing mix, with some loans based on marginal cost-based lending rate (MCLR). Vehicle loans form 57% of the total lending book.
Though asset quality has been broadly satisfactory, the new segment book accounting for 13% of the loan book needs to be closely tracked as it is still unseasoned.
While the company’s assets under management (AUM) and disbursements have grown at 20% CAGR for a decade, the management is confident of delivering 25-30% AUM growth over the next two to three years.
The market capitalization of Cholamandalam at ₹1.3 trillion is far behind the number one player Bajaj Finance’s mcap at ₹4.7 trillion. But both trade at similar valuations at price-to-earnings multiples of 22x and price-to-book value of 4x on estimated FY26 earnings, based on Bloomberg consensus. Simply put, while the macro scenario is favouring NBFCs, investors must not lose sight of the valuation.
Also read | Is Bajaj Housing Finance IPO a gateway to India’s growing housing market?
