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Strong Q4 Performance Boosts Stock
Cholamandalam Investment and Finance Company (Chola) announced a significant financial result for the fourth quarter of fiscal year 2026, with net profit rising 31 percent year-on-year. This earnings surge propelled the company's stock approximately 5 percent higher. Chola achieved a sequential return on assets (RoA) expansion of 50 basis points, reaching 2.9 percent, supported by strong margins and reduced credit costs.
Vehicle Finance and Mortgages Drive Growth
The core vehicle finance segment showed steady growth, outperforming industry trends. This was driven by increased demand for new and used vehicles, alongside Chola's success in gaining market share with original equipment manufacturers. The company aims for disbursement growth between 15-20 percent, projecting an overall 18 percent increase in assets for the fiscal year. The mortgage portfolio, including home loans and loans against property, also saw healthy expansion, benefiting from strong housing demand, particularly in rural and smaller markets.
Improving Asset Quality and Stable Margins
Chola's strategic decision to phase out riskier business lines has positively impacted asset quality. The Gross Stage 2 ratio improved, attributed to better collections in vehicle finance and lower credit costs following the exit from partnership-sourced Consumer & Small Enterprise Loans (CSEL). An overlay buffer of Rs 200 crore was established to protect profitability. Management expects credit costs to remain within the 1.5-1.6 percent target range for fiscal year 2027.
Net interest margins (NIMs) are projected to stay steady around 8 percent. This outlook is supported by a stable cost of funds, growth in higher-yielding segments, and enhanced operational efficiency from digital initiatives.
Positive Outlook and Valuation
Looking ahead, Chola plans to expand its higher-margin business segments to help offset rising funding costs and maintain stable NIMs. The company projects its pre-tax RoA to reach 3.5 percent, an increase of about 20 basis points, driven largely by credit cost improvements. Currently trading at a premium valuation of 3.1 times its FY28 estimated book value, Chola's fundamental strength, improving cyclicality, and stable asset quality are seen as justifying its valuation.