In my piece of 2nd October 2014, I rightly stated that if one is looking for a “rock-solid stock to give steady gains” one has to consider Cholamandalam Finance, the blue-chip NBFC of the highly respected Murugappa group.
I was perfectly justified because since then, Chola has given a hefty return of 85%. The best part is that these gains have come with virtually no risk to the capital.
Of course, my confidence in Cholamandalam stemmed from the fact that Renuka Ramnath of Multiples and Brahmal Vasudevan of Creador, two of the finest investing minds, had entrusted large parts of their capital to the stock.
Both stalwarts invested Rs. 106 crore each in Chola in February 2012 at the throwaway price of Rs. 160 per share.
Renuka Ramnath sold her holding on 14th January 2015 at Rs. 495 per share, netting magnificent gains of 209%.
Ramnath made it clear that she had reluctantly sold Chola. She paid her tribute to the stock in the following words:
“fantastic story of how the new management completely turned around the company and brought them back inline with their core business and brought in a lot of discipline around lending and collections which has resulted in a phenomenal return for us”.
| CHOLAMANDALAM INVESTMENT – KEY FUNDAMENTALS | |||
| PARAMETER | VALUES | ||
| MARKET CAP | (Rs. CR) | 13,847 | |
| EPS – TTM | (Rs.) | [*C] | 36.80 |
| P/E RATIO | (X) | [*C] | 24.10 |
| FACE VALUE | (Rs.) | 10 | |
| LATEST DIVIDEND | (%) | 25.00 | |
| LATEST DIVIDEND DATE | 09 FEB 2016 | ||
| DIVIDEND YIELD | (%) | 0.51 | |
| BOOK VALUE / SHARE | (Rs.) | [*C] | 235.01 |
| P/B RATIO | (Rs.) | [*C] | 3.77 |
| [*C] Consolidated [*S] Standalone | |||
| CHOLAMANDALAM INVESTMENT – FINANCIAL RESULTS | |||
| PARTICULARS (Rs. CR) | MAR 2016 | MAR 2015 | % CHG |
| NET SALES | 1141.24 | 943.68 | 20.94 |
| OTHER INCOME | 1.03 | 0.16 | 543.75 |
| TOTAL INCOME | 1142.27 | 943.84 | 21.02 |
| TOTAL EXPENSES | 304.9 | 245.21 | 24.34 |
| OPERATING PROFIT | 837.37 | 698.63 | 19.86 |
| NET PROFIT | 193.79 | 136.57 | 41.9 |
| EQUITY CAPITAL | 156.21 | 143.73 | – |
(Source: Business Standard)
Brahmal Vasudevan’s Creador is now taking the same route. Yesterday, Creador sold 17,60,000 shares at Rs. 875 each, netting a gain of 447%.
Creador held 42,27,727 shares of Chola as 31st March 2016. This means that the Fund still has 24,67,727 shares worth Rs. 218 crore.
It is notable that Akash Prakash’s Amansa Capital holds 58,00,000 shares of Chola worth Rs. 513 crore.
All experts are unanimous in the view that though Chola is presently quoting at premium valuations of 4.27x FY16 PBV, it is still a great investment given its blue-chip credentials and dominance in the CV and SMC sectors.
Dipen Sheth of HDFC Sec articulated this well:
“Cholamandalam is not cheap. They are 3.2-3.3x on FY18 adjusted book value. But, this is a top class small town lending franchise.
Remember, banks for the foreseeable future are going to be hamstrung and challenged in terms of reaching out to small town India, whether it is businessmen, whether it is one truck, two truck owners and so on. They are in the commercial vehicle finance business in mid-town India, if you can call it that.
The term they use is the top of the bottom of the pyramid and it is a wonderful little niche. And there is a lot of action happening there. One good monsoon and the kind of tailwind that they will get for asset growth is incredible. They have scaled up over the last three years or so assiduously to more than 500 branches all over the country. More than half of these are already into small business lending as well apart from vehicle finance.
I think small and medium enterprise (SME) India is going to go somewhere, whether it is individual vehicle owners, whether it is small businessmen in the next two district capital towns or district capitals and so on. 20-25 percent growth for this company, asset growth is a given here on. And for that kind of growth potential, they are again very lovely users of technology. So, the scale up is going to happen with a less than commensurate rise in costs and a falling of stress.”
Motilal Oswal is also bullish about Chola’s prospects. It has recommended a buy on the basis that “Diversification of loan book towards home loans, normalization of credit costs and reduction of GNPAs / provisioning from the current cyclical peaks should transform the business to 3.0% ROA from current ROA of 2.3% in coming years. Improvement in ROA should translate into a rerating opportunity for the business. We raise our earnings estimates for FY17/18 by 9% and also raise our target P/B multiple to 3.0x (in line with Sundaram Finance; earlier 2.3x) and arrive at a target of INR 1,000 (earlier INR 700).”
Similar sentiments have been expressed by Emkay, KR Choksey and Religare.
So, if you are looking for an ideal buy-n-forget blue-chip mid-cap stock which will slowly but surely compound gains, you have to consider Chola!
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Cholamandalam and Investment is a company active in NBFC domain. It is involved in the businesses of Equipment financing and vehicles financing. It also caters to personal and home equity loans. The company has clocked CAGR growth of more than 25% in top line and around 40% in bottom line for last 2-years. The stock is available at PE of 24 and P/B of 3.8. The company has ROCE of 20% and ROE of 15%. The growth rate is the reason it gets premium valuations compared to its few peers. So this stock can be bought on declines around levels of 80-850 levels and can be hold for next 2 years at least in the portfolio.
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