Cholamandalam Investment Stock Falls 5% on Deteriorating Asset Quality in Q2 Results

Cholamandalam Investment & Finance Company's stock experienced a significant drop, falling as much as 5% on Thursday, November 6th, after the release of its financial results for the September quarter.

The primary reason cited for the stock's decline is a sequential deterioration in the company's asset quality. According to RBI asset classification norms, Gross Non-Performing Assets (NPA) increased to 4.57% from 4.29% in the June quarter. Net NPA also saw an upward trend, rising to 3.07% from 2.86%. Furthermore, the Provision Coverage Ratio (PCR), which indicates the buffer against bad loans, slightly decreased to 33.88% from 34.41% in the previous quarter.

Under the Ind AS norms, Gross Stage 3 assets stood at 3.35%, up from 3.16% in June, and Net Stage 3 assets rose to 1.93% from 1.8%.

Despite these asset quality concerns, other key financial indicators remained robust and in line with market expectations. The company's Net Profit for the period grew by 20% year-on-year to ₹1,155 crore, closely matching the CNBC-TV18 poll projection of ₹1,170 crore. Net Interest Income (NII), the core income from lending, increased by a healthy 24.5% from the previous year to ₹3,378 crore, also aligning with poll estimates. Pre-Provisioning Operating Profit was reported at ₹2,458 crore, in line with the projected ₹2,482 crore.

Impact: This news is likely to impact Cholamandalam Investment & Finance Company's stock negatively in the short term due to heightened investor concerns over asset quality. The rise in NPAs could lead to increased provisioning, affecting future profitability. It also serves as a cautionary signal for other Non-Banking Financial Companies (NBFCs) in the Indian market, potentially leading to increased scrutiny of their asset quality metrics. The market's reaction underscores the importance of asset quality for NBFC valuations. Impact Rating: 7/10

Difficult Terms: * **Gross NPA (Non-Performing Asset):** A loan or advance for which the principal or interest payment remained overdue for a period of 90 days or more. * **Net NPA:** Gross NPA minus the provisions made by the bank or financial institution for those NPAs. It represents the actual bad loans that are not covered by provisions. * **Provision Coverage Ratio (PCR):** The ratio of the total amount of provisions made for bad loans to the total amount of gross NPAs. It measures the extent to which a financial institution has covered its non-performing assets with funds set aside. * **Stage 3 Assets (Ind AS):** Under Indian Accounting Standards (Ind AS), financial assets classified as Stage 3 are those that have objective evidence of impairment at the reporting date, meaning they are expected to result in significant losses. This is broadly analogous to NPAs but calculated according to Ind AS principles. * **Net Interest Income (NII):** The difference between the interest income a financial institution earns from its lending activities (like loans) and the interest it pays out to its depositors and other creditors. It is a primary measure of profitability for financial institutions.