Cholamandalam Investment & Finance Company Ltd Q3 FY2025 Concall Summary

Key Takeaways

• Asset quality slipped, but Q4 inflection promised: Stage 3 rose to 2.91% from 2.83% QoQ, driven by CSEL partnership stress and vehicle finance delinquency. Management expects net credit cost to start declining from Q4, with vehicle finance NCL improving first.
• Partnership book exit is accelerating: The company has shrunk from 10 partners to 3 in two years and plans a complete exit, removing the highest-NCL CSEL portfolio within one year.
• Vehicle finance stress is a known, aging problem: Delinquency in SCV, LCV, two-wheelers and tractors began rising in Q2 of last fiscal year. Management expects cleanup in 1-2 quarters, though industry-level NCL normalization needs 3-4 quarters.[11-12]
• Growth conviction intact despite credit cost revision: Full-year credit cost guidance revised to 1.4% from 1.3%, but management reaffirmed 25% medium-term AUM growth and expects next year's credit cost to be lower.
• What to watch next quarter: Whether Q4 actually delivers the promised credit cost decline, the pace of CSEL partnership rundown, and any stabilization in HCV-linked stress given weak IIP data.

Asset Quality: Where the Pain Is

• CSEL partnership drag: Partnership business carries higher NCL than standalone CSEL. The rundown from 10 partners to 3 over two years will continue to a complete exit, with the small-ticket, small-tenor book largely gone within one year and the balance in two.
• SME NCL reversal path: SME behaves like loan against property, where SARFAESI resolution takes 9-12 months. Cases are now lined up; once auctions begin, NCL reversals will turn SME NCL positive next financial year, improving ROTA.
• LAP stability: Stage 3 has remained stagnant at the same level for 15 months, with normal BAU roll forwards and no significant change in movement. Credit cost normalization from -20 bps to +10 bps is a headwind, not new stress.
• Home loan asset quality: NPA down to 1.2%, NCL at 0.3% and not rising. Affordable housing NCLs are slightly higher but contained.
• SBPL performance: Delivering 6%+ ROA with steady-state NCL of 1.5%-2%.

Kundu: "We have already come down to 3 partners from 10 partners in the last 2 years' time and likely to go down further and will come out completely."

Vehicle Finance: Stress Origins & Recovery Timeline

• Stress started Q2 last fiscal year: Delinquency in two-wheeler, tractor, SCV, LCV and used CV began rising due to rural economy weakness, consumption impact and last-mile transportation issues. The company consciously reduced market share in small CV last year.[11-12]
• Capacity utilization improving, but below last year: SCV/LCV utilization dropped as low as 50% (vegetable supply issues on Nashik-Mumbai route) and has recovered to 70-80%. Last year's second half saw 70% base rising to 90%; this year's improvement is slower.[16-17]
• HCV is the new worry: Heavy commercial vehicle stress is strongly correlated with IIP and GDP, both showing weak data. Chola's HCV exposure is negligible, so the direct hit is limited, but industry-level NCL normalization needs 3-4 quarters.
• Used CV turning: Used commercial vehicle is improving and showing better capacity utilization; used HCV performed better in November and December.
• Two-wheeler selectivity working: Overall two-wheeler across all OEMs has problems, but Chola's performance looks better due to OEM selection.
• Collection infrastructure built out: 31,000 of ~65,000 employees are in collections, ratio unchanged from a year ago. 55% of new hires went to collection. A separate bucket-wise approach was created for different products (Car & MUV, 2-wheelers, soft/hard/medium buckets).

Kundu: "For the industry, it might take commercial vehicle is improving in 3 to 4 quarters. As far as Chola is concerned, we mentioned that we have seen a little improvement in November and December, and therefore, Q4 will be better."

Credit Cost Trajectory

• FY25 credit cost revised up: Full-year target moved to 1.4% from 1.3%, driven by new business investments and LAP normalization, not just vehicle finance stress.
• Q4 inflection expected: Net credit cost should start declining from Q4 onwards because Chola's HCV exposure is negligible and HCV is the segment currently under stress. Q4 will be better than Q3, though improvement will not match last year's level.
• Next year lower: Management expects next year's credit cost to be lower than the current year, banking on vehicle finance improvement and CSEL exiting partnerships. Vehicle finance net credit cost specifically will be lower next year.
• CSEL NCL path: Currently at 5.75%, will initially come down below 5%, then decline further as the partnership book runs off.
• SME steady state: In steady state, SME will behave like LAP; 0.5% NCL can be taken as steady state.

Growth & Segment Dynamics

• 25% growth commitment: Medium-term 25% AUM growth expectation still holds and will be delivered next financial year. Disbursing at 18% rate achieves 25% AUM growth after accounting for run rates and pre-closures.
• Home loan yield pressure: 20 bps sequential decline driven by competitive pricing in self-employed categories; yields expected to stabilize. Income range of 15.7%-15.9% is comfortable and management hopes to maintain it.
• CSEL income reversal: Yields declining sequentially because of income reversal when customers get written off.
• Assignment gain: ₹65 cr net gain on derecognition from an assignment transaction, a one-off request from a bank, not normally done.

Margins & Operating Efficiency

• Next year margin higher: Vehicle finance, at 56% of the book and fixed rate, benefits most from rate cuts. Marginal rate is still higher than book rate and transferring slowly, giving 10 bps benefit quarter-on-quarter.
• Borrowing cost: Holding at similar levels; if rate reductions come, they will flow through with a one-quarter lag. Transmission depends on whether banks pass on MCLR reductions.
• Opex elevated, flat for two years: Currently at 3% level. New business investments will continue; opex will start reducing only after 2 years, not year-on-year. Opex to assets will stay flat for the next couple of years, then decline.
• Vehicle finance opex improving: Collection manpower added over the last 1-1.5 years will not need further increase to achieve next financial year's targets. Trends seen in the last two months will be maintained, with improvement expected next financial year.
• Home loan ROA: At 4.3%, can go up only when opex goes down. Yield can decline a little but opex improvement will offset; no change at ROA level.

Kundu: "When the investment on the new businesses will get over. And then definitely, we will be reducing the opex, which is going to be after 2 years, not year-on-year immediate."

Guidance & Commitments

Key Metrics