Cholamandalam Investment: H2 Comeback Expected! Analyst Sees Upside, Recommends Buying on Dips

Cholamandalam Investment and Finance Company Limited reported a mixed performance in Q2FY26, characterized by flat loan disbursements and moderated Asset Under Management (AUM) growth, alongside stressed asset quality. Despite these operational challenges, the company is optimistic about a significant comeback in the second half of FY26 (H2FY26), buoyed by favorable policy interventions and improved macroeconomic factors. The impact of GST rate reduction is expected to benefit the core vehicle finance segment in the long term, particularly for light and medium commercial vehicles.

Growth in the mortgage segment was affected by procedural changes in registration, while exiting digital partnerships in the Consumer and Small Enterprise Loans (CSEL) business slowed new business acquisition in H1. However, October saw a healthy pickup, driven by fleet utilization and festive demand. The company plans to re-calibrate its growth strategy, focusing on new engines like gold loans and consumer durables, aiming for a 20-25 percent AUM growth target in FY26, with specific goals for the mortgage (30% growth) and core vehicle finance (20% growth) books.

Asset quality is expected to stabilize in H2FY26. The Gross Stage 3 (GS3) ratio, which increased due to seasonal factors and a prolonged monsoon, is anticipated to improve with tightened underwriting policies and better collections. The credit cost is guided to decrease to 1.6 percent in H2 from 1.8 percent currently, supported by a declining trend in net slippages, though the monsoon remains a near-term concern.

Profitability is projected to improve, with Net Interest Margins (NIMs) expected to increase by 10-15 basis points in H2 due to lower funding costs. High-yield segments like gold loans, pre-owned vehicles, and cars will further support NIM expansion. Tight control on credit costs and operating expenses (opex) is expected to boost Return on Assets (RoA).

While the company might miss its initial 10 percent annual disbursement growth target due to muted H1 performance, the AUM growth guidance remains on track. Supportive GST rates and interest rate tailwinds are expected to drive credit growth and profitability in H2.

**Impact** This news is significant for the Indian Non-Banking Financial Company (NBFC) sector. Positive outlook and analyst recommendations can influence investor sentiment towards Cholamandalam Investment and Finance Company Limited and potentially other similar companies, impacting their stock prices. The company's performance metrics like AUM growth, asset quality, and NIMs are key indicators for the financial health of the NBFC sector. Rating: 7

**Difficult Terms and Meanings** * **AUM (Asset Under Management)**: The total market value of all financial assets that a financial institution manages on behalf of its clients. For Cholamandalam, this refers to the total value of loans outstanding. * **NIMs (Net Interest Margins)**: A measure of the difference between the interest income generated by a financial institution and the interest paid out to its lenders. It indicates profitability from lending activities. * **GS3 (Gross Stage 3)**: A classification under accounting standards (like IFRS 9) for financial assets that have experienced significant credit risk or are impaired. Loans in GS3 are those for which repayment is doubtful or significantly overdue. * **CSEL (Consumer and Small Enterprise Loans)**: Loans provided to individual consumers and small businesses. This segment can be more volatile and subject to different risk profiles. * **RoA (Return on Assets)**: A profitability ratio that measures how efficiently a company is using its assets to generate earnings. It is calculated by dividing net income by total assets. * **NBFC (Non-Banking Financial Company)**: A financial institution that provides banking-like services but does not hold a banking license. They offer services such as loans, credit facilities, and investments. * **GST (Goods and Services Tax)**: A consumption tax imposed on the supply of goods and services in India. Changes in GST rates can affect business costs and consumer demand. * **CV (Commercial Vehicle)**: Vehicles used for the transportation of goods, such as trucks and vans. This is a core segment for Cholamandalam Investment. * **FY26 / H2FY26**: Fiscal Year 2026 / Second Half of Fiscal Year 2026. India's fiscal year runs from April 1 to March 31. * **Basis Points (bps)**: A unit of measure used in finance to describe small changes in interest rates or other percentages. 100 basis points equal 1 percent. * **Opex (Operating Expenses)**: The ongoing costs incurred by a business to maintain its normal operations, excluding the cost of goods sold and interest payments.