South India-based financial services
companies, be it banks, NBFCs, other lenders, or any other financial service
providers, have gained reputation for their integrity, fair business practices,
dedicated customer service leading to customer loyalty and conservative style
of operation. Families such as the TVS group, Murugappa group, Shriram group to
name a few, are still spoken with respect not only in India but also overseas
due to these reasons.
While much attention has been
focused on Sundaram Finance and Shriram Transport Finance, the listed finance
arms of TVS and Shriram groups respectively, by analysts and media alike due to
their superior performance and returns over the years, not much is talked about
another entity coming from a similar parentage – CIFCO of the Murugappa group. The
reasons could be many including its slightly turbulent past few years, but it
has silently gone about its business of cleaning up its operations and looks
set to join its peers in times ahead.
Cholamandalam Investment & Finance Co. (CIFCO), the financial services
arm of the Murugappa group, was set up in 1978 with the primary objective of
offering asset finance through leasing and hire purchase to corporates and then
to retail customers. It has since evolved itself into a large, composite
financial services organization that operates from over 350 branches across
India with AUM of over Rs.10000 crore. Today, CIFCO is a pan-Indian, composite
financial services provider that offers vehicle finance (new and used HCVs, LCVs, SCVs, MLCVs, MUVs,
tractors, and cars and 3 wheelers), business finance, home equity loans,
stock broking and distribution of financial products to its customers. It
comprises the parent company, CIFCO, and its subsidiaries Cholamandalam
Distribution Services Limited (CDSL) and Cholamandalam Securities Limited
(CSec).
In 1997, CIFCO entered into a JV
with Cazenove Fund Management Limited of U.K and launched its MF business in
India. CIFCO held a 51% stake and Cazenove the balance 49%. This venture lasted
for 4 years when CIFCO opted to look for a bigger international player in this
area and bought out Cazenove’s 49% stake. It was the renamed as Chola AMC.
In Jan '06, Singapore-based DBS
Bank (the largest in Singapore then) bought equity shares of CIFCO @150/share
from the Murugappa Group's flagship, Tube Investments (17.4%), public
shareholders (20%) through an open offer and subscribing to a preferential
allotment of 30 lakh shares. The transaction resulted in DBS Bank and the
Murugappa Group having equal shareholding of up to 37.5% each in the company.
The shareholding of the Murugappa Group in CIFCO was at 55% prior to the deal.
While continuing its focus on the core business of vehicle financing, the
company entered the retail financing business with new products for personal
loans and home equity. CIFCO was then renamed as "Cholamandalam DBS Finance".
Under this arrangement, DBS also partnered CIFCO in their existing asset
management venture renaming the company as Chola DBS AMC. This carried on the AMC
business for a few years, but was unable to establish its credibility in the
Indian market, barring a few of its schemes which performed well. L&T
Finance which was looking for an entry into this business bought it over and in
the process got the license to run an AMC. At a valuation of 1.56% of the AMC’s
AUM, of about 3000 crore, this was a steal for L&T Finance and one of the
cheapest deals in the MF space. However, it must be noted that Chola DBs AMc
was a loss-making entity at this time.
In Jan ’09, the JV went thru a
turbulent phase when both partners negotiated with each other to buy the other
out. Finally in April ’10, the Singapore-based DBS Bank sold its entire 37.48
per cent stake in the company Cholamandalam DBS Finance to the Murugappa Group
holding companies, Tube Investments of India and New Ambadi Estates. Following
this, the company was again renamed to its original name i.e. CIFCO and is thus
now a subsidiary of Tube Investments.
A few months back, in March ’12, Multiples
Private Equity (floated by the former ICICI Venture CEO, Ms Renuka Ramnath) acquired 5% of the total equity share of the company through preferential allotment. Another fund, Creador (floated by a former managing director at ChrysCapital)
has also invested around 5% here @160/share. Since then the price has steadily
climbed to more than 200 currently.
Over the last few quarters, the
company has shown strong loan growth, better NIM and lower provisioning
and looks set for growth in the coming quarters. While Sundaram Finance trades
at a P/B of 2.32 and Shriram at 2, CIFCO is quoting at 1.87. Considering that even
M&M Financial Services trades at a P/B of 2.36, there is still scope for at
least 20%, if not more, appreciation here, from the current levels.
CIFCO (Cholamandalam) has run up to about 271 from about 200 in July ’12, when it was first reported on, a return of 35% in 5 months. Yet, on the valuation front, it is way cheaper to M&M Financial Services another promising name in the NBFC space backed by a respected corporate. However, it compares favorably with Bajaj Finance another good name in the same category. Here the comparison is strictly with NBFC focused on the retail segment and hence companies like Shriram Transport and Shriram City which are majorly into auto-financing.
ReplyDeleteSo there is still some steam left in both Bajaj Finance and CIFCO.
The granting of banking licenses has led to a rally in several NBFCs some of which have run up way ahead of fundamentals. So it might make sense to pause and have a reality check on valuations before plunging in. After all, it is not as if on getting a banking license, the NBFC will overnight transform into a highly profitable, high growth bank. It will not be an easy task amid strong competition from well-entrenched private banks, if not PSBs.
Since writing this post in July ’12, CIFCO has moved from 202 to the current 522 as of today’s closing, giving a return of 150% in 2 and a half years @CAGR of nearly 46%. Analysts expect it to quote @P/BV in the range of 2.3-2.7 for the next 2 years which would still be cheaper than some of its peers such as M&M FS. And the key areas it operates in – Vehicle financing, financial products distribution as well as stock broking are all seeing good traction and will continue to do so going forward for the next few years.
ReplyDeleteCurrently NBFCs focused on the housing finance sector are the flavor of the season due to the impending rate cuts. And the result is that quite a few of these HFCs have run up too much too soon and are quoting at expensive valuations. Sooner or later, this should also spread to NBFCs in other areas as well as soon as an improvement in the operational areas is visible which would be a direct function of the health of the economy.
Gladdens my heart to see a multi-bagger here....from about 200 in July '12 to 1000 i.e. 5 times in 4 years...if this isn't a multi-bagger, then I don't know what is ! With a clean management, a low profile and good prospects forecast for NBFCs post the foreasted good monsoon and NPA-issues plaguing PSU banks and to some extent even some of the better private ones like ICICI and Axis, it is exactly companies like Cholamandalam which will go about their business in their usual, solid way, and continue to do well. Hold it for long enough to get solid steady returns a la Bajaj Finance.
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