Cholamandalam Investment Finance posted its earnings for the quarter ended June last week. The non-banking finance company’s profits for the quarter went up 28% year-over-year to ₹726 crore. The company’s assets under management also rose 42% year-on-year to ₹1.22 lakh crore. Total disbursement also saw a 50% year-on-year bump at ₹20,015 crore.

As the numbers show, the company saw all-around growth in a seasonally weak quarter. So we sat down with the Chennai-headquartered NBFC’s CFO, Arul Selvan to get deeper insights into the company’s quarterly report.

What Powered The All-Round Growth?

Apart from the robust growth in the company’s assets under management and disbursals, all of its segments also saw healthy growth during the June quarter. Talking about the drivers of this growth, Selvan said, “What Chola has been doing over the past few years is to diversify its book into multiple products. Even within vehicle finance, we are across the board. Compared to other NDFCs we have a wide portfolio mix.

“Beyond vehicle finance, we have also gone into loan against property, home loans and now the three new businesses SME, consumer finance and the SBPL (Secured Business & Personal Loans) business. What is happening in the economy is after Covid every sector of the economy is growing. So this diversification has helped. See the purpose of the diversification was originally to see if something is not growing, something else can be leveraged to keep the growth going. But today we have a situation, you know, where I would say that every sector is growing. So for us, because we have put in place systems, processes as well as people to grow these segments we are able to start firing on all cylinders. So that is helping us to grow faster.”

Talking about whether the company can see this growth continuing in the coming quarters Selvan told Benzinga India that “We see that this (growth) will more or less continue. Q2 is a little bit of a slow quarter because it has got some inauspicious months and heavy rains will be there in most parts of the country, etc. So Q2 may have not-so-good growth but Q3, Q4 onwards we should again see good growth coming in.”

The Pressure On Margins

Despite the all-around growth, the company’s margins were under pressure. Net interest margins moderated sequentially, and PAT also went down around 15% quarter-over-quarter. The margins also missed consensus estimates. Addressing the subject Selvan said that he agrees that the margins are slightly under pressure because the cost of borrowing has been increasing substantially.

“The cost of funds has been increasing substantially and in a very quick manner over the last few quarters but I would say the increase in the cost of funds at least to the extent what RBI has done so far has been sort of absorbed. Unless further increases happen by RBI or other external factors there should be no major cost of funds swing in Chola’s books,” he added.

Selvan also explained that since 62% of the company’s book comprises vehicle finance, “which is a fixed-rate book, so it takes a little longer time to increase the earnings in line with the cost of funds increase. So to that extent, it will take another two to three quarters for the yields on the vehicle finance book to improve to match the cost of fund increase.”

On the profit after tax level, Selvan said that the company is more or less at the committed levels of around 3.3% to 3.5% and thinks that “it will still be in the above 3.5% for the full year moving forward.”

Treading Vehicle Finance

Market experts have predicted that the auto sector might see some moderation in the coming months. Now, as mentioned above, vehicle finance amounts to a large chunk of the company’s business, so the question is how Chola plans to deal with the moderation going forward.

“That is the whole reason for the diversification of various products. Even within auto, we are not in one single product. We are in the heavies, lights, mini lights, cars and MUVs, tractors, construction equipment, two-wheeler, everything, and we also do used-vehicle finance. Most of the time when the industry goes through a cycle, well, there could be a slowdown in new vehicle purchases, but there will always be also some traction in the used vehicle segment.

“This is within vehicle finance itself, but then of course, you know, we have the new segments as well as the home loan and LAP where we are expanding geographically. So those cylinders will keep firing to make sure that the overall growth is at a decent pace,” Selvan said.

The Growth In The New Businesses

The company’s newer business segments showed strong growth this quarter. As per the company’s statement, Small and Medium Enterprises Loan (SME) business, Home Loan (Affordable HL and Affordable and Consumer and Small Enterprise Loans (CSEL) saw disbursements grow by over 100%. Talking about the segments Selvan said, “So far our experience in all the new businesses which we have started you know last year or a year and a half back has been quite positive. So to that extent, we are progressively wanting to scale them up to capitalise on both customer reach and geographical reach to make sure that we can grow our book robustly.”

When asked if the company was planning to diversify further into more loan segments, Selvan said, “At least for the next 6 to 12 months we will stabilise these new businesses. As we were saying earlier, the three new businesses should form part of at least 15% of the overall asset types. We may examine new business if at all in the future. But right now the focus would be to make these new businesses larger and then stable over the cycles.”

Selvan explains that while the new business has a larger op-ex today, building up a new business involves a lot of additional costs, pertaining to new technologies, people and marketing etc. But going forward he adds, “As we build the book the op-ex will get amortized over a larger AUM. He expects the business to be “PBT-accurative and PBT-rate accurative over the next few quarters easily.”

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