Cholamandalam Investment & Finance - Getting future ready

Financing business is simple but not easy, as often is quoted by many successful investors. The management that does not sway away and get influenced by the market forces but stick to their laid down principles of prudent lending, recovery and risk management processes will create long term sustainable shareholder wealth.

Lending can be largely divided based on the end purpose of the money as follows. The definition is NOT strictly applicable as many criss-cross lending is involved.

  1. Income generation activities: Vehicle buying (trucks, tractors), machinery, working capital requirements. Example: Cholamandalam, Sundaram, banks, Shriram, Magma etc.

  2. Consumption activities: Purchase of discretionary items like TV, Fridge etc, furniture, laptop, pest control (!), interior enhancements of existing office. Example: Bajaj Finance (though it also lends to income generation activities too), Capital first etc.

  3. Asset creation: Best example is Housing finance. Here the asset is of emotional value too which explains the generally low levels of NPA compared to other types of lending companies. Example: Gruh finance, Canfin Homes, PNB Housing, Repco, Dewan, GIC, Indiabulls and a host of other brokerage NBFCs who have a housing finance companies.

  4. Income generation at lower end of the pyramid: Micro-finance institutions. Typically the money is used for purchase of cattle, milk vending, micro enterprises, home businesses by ladies etc. The end users for this lending are impacted hard for any small change as they tend to have the lowest amount of discretionary money in hand and the scope of taking vagaries of business cycle and interference of outside influencers is minor.

Secular vs. Cyclical: The lending for consumption tends to be secular in nature while the lending for trucks tend to be cyclical as truck buying is directly related to the economic activity. So before investing in such a company, you need to be aware of the business cycles and which end of the cycle we are in and what valuations are the companies trading at. Of course, there are companies that tend to protect wealth much better than others during the downturn because of the prudent lending approach. The one who lent with careless attitude will get its equity wiped out during the cyclical lows.

The shareholder destruction is particularly harsh in lending companies because the raw material here is money! Business groups like HDFC, Kotak, Sundaram, Murugappa (Cholamandalam) tend to create sustainable wealth. HDFC, Kotak could even surmount the cyclical nature of lending business with their perfect balance of conservativeness vs. aggressiveness across business cycles. While the southern founded groups are ultra conservative with the best example being Sundaram finance. So, the wealth creation has been a little slower in these groups.

But the murugappas and sundarams survived world wars, financial crisis, Asian currency crisis of the 1980s and have a history of 100 years (Murugappa)! I personally believe with the advent of global education the next generation leaders at these business houses are more attuned to the shareholder wealth creation while keeping the values same. So, over the next decade, I expect these business groups to flourish.

It is extremely heartening to note that Sundaram finance did not raise equity for 40 years despite being a finance company where now a days even technology and asset light businesses go for QIPs left right and centre. While growth is very important, going sow in times of lower economic growth without mindlessly lending is more prudent approach. Immediate example of not raising equity for a decade is Gruh finance despite being a housing finance company.

Raising equity is not a great thing, in my opinion despite the argument that raising equity at high P/BV enhances shareholder value. Both Sundaram and Murugappas gave birth to super subsidiaries with their internal accruals rather than equity raising or huge debt while growing the standalone businesses. This shows the inherent strength of their business models. This gesture done over the last decade would come to fruition in the next economic up cycle is my personal belief.

Importance of Collateral:

The companies whose collateral rises in value with time or remains stagnant will typically have lower NPAs because of ‘economics’ from user’s perspective. Why would some one risk surrendering the collateral if the collateral’s value is greater than the outstanding loan? OR Why would some one risk losing an income generating collateral (like a truck)? As soon as a truck is confiscated, the owner tries all methods to repay the EMI and get back the truck and keep his business running!

Now imagine a loan has been given to fund a vacation, buy furniture for a new office, without a collateral. As long as the music is on EMIs will keep coming and at the first instance of trouble the EMIs for such loans will stop while at the same time the EMIs for his/her house, truck, machinery will keep going on! The consumers will prioritise the loan as per the ‘bread providing’ ability of the purpose of the loan. Quite logical, as you and me and everyone would do the same.

So, it is very important to note that GROWTH alone is NOT a sufficient parameter is investing in a lending company. It is the risk adjusted growth, collateral adjusted growth that is more important. Even if it is a housing loan if it is given without proper cashflow analysis to consumers to show cheetah fast loan book growth someday it will come back and bite you. So, the risk management practices comes into picture.

Anyway, coming to the company in discussion here, CHOLAMANDALAM is a company promoted by the Murugappa group.

Cholamandalam had its near death experience during 2009 when its partnership with DBS floundered big time. As per my reading at the advent of the economic top, Cholamandalam went on its lending spree for consumption,mostly to laptops. I believe, no evidence I have, that Chola would have depended on DBS for its business as DBS is a reputed group in Singapore. With the slack risk management practices, NPAs mounted and then Murugappas eventually took over the reigns by buying out DBS’ stake and appointing its own management and scripted magnificent turnaround. The valuations in terms of P/BV has grown almost 8 times plus the usual book value growth.

During the peak of its distress the group maintained high ethics, management morale, employees were largely shuffled to other group companies without any large scale employee firings. For me, the most important aspect of this turnaround was the discovery of Mr. VELLAYAN SUBBIAH an IIT alumnus.

Mr. Vellayan Subbiah brought the much needed consistency, predictability to the business which attracted large and reputed shareholders like CARTICA etc. He has left Chola now to manage the manufacturing business Tube Investments which is the holding company of Cholamandalam.

Cholamandalam is primarily engaged in the business of lending to below segments. Chola is very well geographically diversified and most of the lending is to rural and sub urban areas = socio economic class of B & C. They call it as the top of the bottom of the pyramid. The current AUM of the combined business is about 35000 crores.

  1. Commercial vehicles (CVs) with market leadership in Light commercial vehicles. Construction equipments, tractors, cars, used CVs etc. This forms about 60% of the AUM. This 60% is further divided into: LCV:HCV:Others = 50:22:28.

  2. Home equity (LAP) and Housing Loans: This should form the rest of the business. They started going slow on HE business at the start of 2016. They were one of the firsts to recognise the problem in this segment and have withdrawn ahead of the competition. While at the same time companies like Repco were accelerating. I believe this is what differentiates great managements from others. This is my personal observation, do not have statistics to prove my point.

From last quarter they have started accelerating the growth in this business but with focus on lower ticket size as banks were competing in the high LAP ticket size. I believe Bajaj Finance was the other company along with Chola which was ahead of the competition to recognise the pain and went slow.

Chola has recently tied up with HUDCO to increase focus on House Loans with clear focus on affordable housing segment. Over time, I believe this segment of lending will help it grow during the next cyclical downturn. In my opinion, Chola will have the best mix of cyclical and secular lending business few years down the line with risk adjusted growth and NPAs. Since the book is mostly of fixed lending in nature, the lower cost of funds and moving away from bank borrowings to market bonds will help it reduce the cost of funds.

Chola is also a very tech savvy while I believe the tech savviness was a bit delayed venture owing to its turnaround focus and the slowdown in its cyclical business form 2013. From 2013, its recovery costs were very high with gradual tapering off in times to come. All these should actually aid immensely in achieving RoA of 3% and RoE of 20% over 2-3 years. Thus a 20-25% grower with excellent management (the new CEO N. Srinivasan is a veteran of the Murugappa group who was also responsible for turning around the business and is incidentally the elder brother of Tata Group Chairman N. Chandrasekaran. What a family, I would say! Arun Alagappan (promoter) was appointed as an executive director. I believe eventually Mr. Arun will take over from N. Srinivasan after being groomed for the role for the next 2 years. It is this excellent philosophy of grooming the next generation leaders the hallmark of its longetivity. Mr. Arun was with Tube Investments if India earlier.

Chola has withered the demonetisation quite well compared to its peers. The results, the NPAs, the growth of the business is the testimony to this.

The company has withdrawn its payment bank license last year and I was very happy with this prudent decision which actually was the time when I started looking at the company. It may sound frivolous, but I was waiting if the company would go ahead or withdraw the payment bank license and I wanted to invest IF it withdraws.

Chola also has a securities subsidiary (brokerage) Cholamandalam Securities and wealth management subsidiary Chola distribution services engaged in distribution of mutual fund products, insurance etc., they are quite small in relation to its main business. However, I believe over the next decade they could grow into sizeable businesses with growth of the Indian economy. Let’s not attribute any value to this business anyway. Chola has also invested in a startup Whitedata systems which is a freight data aggregator on the line of Uber, Ola but not near to such scale at all. I’m not sure how this pan out either. Let’s not value this business too.

The story of economic growth of India over the next few years will play a major role. Even during the tough times, the business has maintained secular growth of more than 20% with excellent book quality (compared to its peers) even while moving towards 90 DPD NPS recognition as per RBI norms for NBFCs.

I assume, sometime in future at an appropriate stage Chola might apply for a banking license. This is all pure conjecture and should not hold the thesis for investing at the current juncture.

I will not go into the valuations analysis and numbers in my post as this is largely subjective. While valuations at the entry point are very important, equally important are the opportunity size and how management is placed to effectively exploit this, risk adjusted growth, management quality, consistency and predictability of the earnings.

The company is quite discovered as mutual funds and FIIs hold large stakes in it and is quite actively researched by brokerage houses.

Latest investor presentation:
Latest annual report:

Getting future ready is the theme of the latest annual report, which I agree to as well.

Disclosure: I hold shares in the company from the past and have bought or sold in the last 30 days. I change my opinion quite swiftly based on change of facts. I’m not SEBI registered analyst and this is not a recommendation but purely a discussion for educational purposes.


Isn’t GNPA of 4.7% and NNPA of 3.2% on higher side.

@KrishnaA for excellent presentation. Yes Chola in the last quarterly call mentioned that Investors will see the effects of Digital Chola from Next FY onwards. This will help improving the overall productivity of operations and hopefully reduce cost

They have introduced a new type of loan ‘Trip Loans’ little innovative that will help manage the truckers working capital.

Since I come from Logistics industry, White Data system has a product called ‘iLoad’ that is working as truck aggregrators in the B2B market

Can’t expect a better result from chola. Good revenue growth , 55 percent PAT growth, home equity showing growth after quarters of self declared conservative lull, ROE up from 15 to 20 percent , NNPA down from 3.5%+ to 2.3%

Disc : Invested

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Murugappa group is one of the best managed groups in the country. All group companies are doing very well - Coromandel, EID Parry, Shanti gears, Carborundum, 2 Cholas.

In a recent interview mgmt said that their finance vertical would be the torchbearer of the group going forward.

Disclaimer: Tube Inv is among my top 3 holdings

If one remembers, 2016-17 AR was all about going digital. Combine that with improved numbers in results and below statements from latest concalls transcripts and it connects. The impact in terms of digital and analytics adoption for propensity to pay modrls, credit analytics models visible in results

Fabulous company. Still underrated. Has been 5 bagger for me. When I bought everyone asked me to but Shriram Transport, which has not even doubled in same period.

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Also, GNPA and NNPA numbers are better than Shriram.

Super results by chola , you PAT up 32%
Disbursements look encouraging
NPAs further down
Home Equity disbursals may be initial sign of revival
Branch network up from 708 to 870

Investor-Presentation-Mar18 (1).pdf (2.6 MB)

Disc : Invested

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Not much discussion on quality multi-bagger companies like this on this forum unfortunately.


Excerpts from annual report:
Ind-Ra predicted large NBFCs to grow 16% year-on-year (YoY) in FY 17 and 21% YoY in FY 18, which on the system-wide basis would be close to one third of the total system’s incremental credit.

FY 17 the domestic CV industry sales registered a growth of 3.3% in volumes in comparison to a growth of 11.5% in FY 16
The vehicle finance (VF) business posted a disbursement growth of 17% and PBT growth of 23% in FY 17

In line with CRISIL research estimated market growth of 21%-23% for FY 17 which was then revised downwards, in Q3, to 14%-16% for FY 17 due to muted economic activity and the demonetization impact.
Managed assets for the business grew by 8.48% during FY 17 and stood at 9,593 crores as against 8,851 (despite a 12.1% drop in the disbursements during FY 17)

AUM in this business stood at 379 crores as of March 2017 against 423 crores as of March 2016.

The number of Mana Gromor centres is proposed to be increased to 200 during FY 18. (via Coromandel International Ltd)

ALM position was also strengthened with long-term borrowings in the form of medium-term loans and medium/long-term NCDs which contributed ~75% of the incremental borrowings (note: sales for FY17 was 4,693.58 crore)

The company’s interest cost as a percentage of average borrowings decreased from 9.7% in FY 16 to 9.1% in FY 17.

The capital adequacy ratio stood at 18.6% (Tier I: 13.6% and Tier II: 5.0%)

Financial review:
The company’s aggregate loan disbursements grew by 13% from 16,380 crores in FY 16 to 18,591 crores in FY 17. This was primarily on account of a 17% growth in vehicle finance disbursements.

Gross salary of MD: Rs 402.54 cr (future salary increase : 7.50% p.a)

Rivals: Shriram transport finance (Piramal finance), Muthoot Finance, Bajaj Finance, M&M finance, (IIFL Finance) etc

Hi guys. The company has posted it’s liquidity situation to the exchanges.
Suggest that the experts in the forum take a look at this.


Looks in excellent position as usual. A conservatively managed high quality, high growth NBFC.

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Excellent results as usual

Disbursement up 26%
AUM up 31%
NP up 49%
NPA down from 2.9 to 1.6%

Disc: Invested


Sector Update: by HDFC Security & Motilal Oswal

Q3 FY2019 Result

Result Comments:
Motilal Oswal – Margins stable, AUM growth steady across segments
HDFC Security – Good show in tough times
Prabhudas Lilladher – An all round performance


This is one of the companies geared up for good run. Has been a very consistent run for last 4 years. Seems to have right processes in place with a growth mindset. As growth has not led to additional slippages.

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Chola Investment and Finance Company Ltd

Key Highlights Of Q3FY19 and Nine Month FY19 Results


  • Q3FY19
    • Disbursement grew by 13 % to 7644 Cr from 6761 Cr last year same quarter.
    • PBT grew by 37 % to 464 Cr from 338 Cr last year same quarter.
    • Business AUM grew by 29 % to 50,393 Cr from 39,005 Cr last year same quarter
    • AUM including investment grew by 32 % to 52,868 Cr from 39,985 Cr last year same quarter.
    • PAT grew by 39 % to 304 Cr compare to last year same quarter.
    • GNPA decline to 2.7 % compare to 3.7 % last year same quarter
    • Provision coverage rate improved to 45.2 % from 36.8 % last year same period.
  • Nine Month FY19
    • Disbursement grew by 26.02 % to 21,558 Cr from 17,106 Cr last year same period.
    • PBT grew by 40 % to 1362 Cr from 972 Cr last year same period
    • PAT grew by 41 % to 894 Cr compare to last year same period
    • PBT-ROTA improved to 3.8 % against 3.5 % last year same period.
    • ROE moved up to 21.43 % compare to 18.34 % last year same period.
    • GNPA reduce by 92 Cr from 1467 Cr from 1375 Cr last year same period.
    • Reduction in NPA assets under Stage-III of 29 Cr to 1639 Cr from 1668 Cr last year same period.
    • Coverage ratio for stage-III improved to 36.9% from 35.85 % last year same period.

Key Highlights

  • Improvement in ROTA can be attributed to do drivers in reduction in expected trade loss by HE and HL verticals and reduction in operating cost for the VF vertical.
  • Operate 891 branches across 27 states and union territories , six new branches have been added in Q3 and

Segmental Highlights

  • Vehicle Finance business
    • Disbursement grew by 27 % compare to last year nine month period.
    • PBT grew by 35 % compare to last year nine month period.
    • ROA stood at 3.5 % levels.
    • Growth will continue riding on the BS-VI pre-buying implementation.
  • Home Equity
    • Disbursement grew by 18 % compare to last year nine month period.
    • PBT grew by 59 % to 221 Cr compare to 139 Cr last year nine month period.
    • ROA level stood at 2.75 % compare to 1.9 % last year nine month period.
    • Capital adequacy ratio stood at 17.83 % for Q3FY19 , tier-1 being 13.09 %.
    • On HL front company will be growing moving into a new company which will be Cholamandalam Home Finance.
    • Company have increase the yield even on the sub products almost by 40-50 basis points in vehicle financing portfolio. At the same time incremental cost of borrowing stood at 30-40 basis point.
    • Debt equity has come down from 9.09% to 7.12% YoY and it has been consistently coming down for every month. Company early default has come down from 2.21 % to 1.47 %.


  • Company is shifting toward high yield product
  • Company ROTA will be maintained and improve going forward to about 4 % in next year.
  • Overall company see 25 % growth in FY19 , in vehicle finance growth will be in range of 10-12 %.
  • In housing finance company is planning to open 200 branches in next financial year.
  • In next financial year there will be Pre-Buying happening in Q3 and Q4 due to BS-VI.

Good results. Home equity back on growth path. Auto doing well. NPAs down further. ROE n ROTA respectable .On one side , financial sector spooking out surprise after surprise, chola going strength to strength. 29% pat growth n lowest NPAs. With many aggressive NBFC suffering due to poor lending when chola decided to go slow in home equity, believe their good days of home equity is back even if auto disappoints a bit. Results are commendable considering auto slowdown n NBFC crisis

477ca513-b163-4dde-9957-03b5757f66e0.pdf (163.9 KB)

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