Cholamandalam Investment and Finance - Initiating Coverage 12 June 12

JM Financial Institutional Securities Private Limited

Multiple drivers at play

� Renewed focus on vehicle finance to drive sustainable earnings growth: Cholamandalam Investment and Finance Company (CIFC), a part of the Murugappa Group, offers vehicle finance (73% of AUM, focus on LCVs and used CV), home equity, LAS and gold loans etc. In 2010, CIFC exited personal loans JV with DBS due to heavy losses and renewed focus on its core strength of vehicle finance. We believe a) Gain in market share b) Product additions c) significant investment in branch additions to create pan–India distribution network and d) clear focus on tier III and IV cities (90% of branches in rural/semi-urban); will lead to sustainable earnings growth going ahead.

� Well positioned to deliver growth through network expansion, product additions and market share gains: We believe CIFC is well positioned to deliver 25% CAGR in AUM, with vehicle finance being primary driver of growth, through a) Expansion in distribution network: To reach branch network of 600 by FY14E by adding 225 branches over next 2 years (added 200 branches in last 2 years), b) Market share gains in LCV (gained 5% in last 2 years) and used CV market through improved productivity of branches and competitive pricing (in used CV) and c) Product additions: Introduced tractor financing in FY12 which is expected to contribute 10% of VF AUM by FY14E.Further, company has also started offering gold loans (started pilot project, though this will not be significant focus area). We expect stable margins leading to 29% CAGR in NII over FY12-14E.

� Operating efficiencies to kick–in by FY14E; expect 34bps decline in cost ratios over next 2 years: We expect CIFC’s cost to assets ratio to improve 34bps to 3.4% over FY12–14E driven by a) improved productivity (substantial migration to branch ‘D’, ‘C’ & ‘B’ category from branch ‘E’ which is the lowest in productivity), b) use of technology, c) complete run-off of PL portfolio.

� Credit costs at historical lows; we factor normalized credit costs of 85bps over FY12-14E: Despite losses in PL portfolio, CIFC managed to keep credit losses of its core business under check. CIFC’s current credit costs are at historical low levels. While we expect asset quality to remain healthy, we factor normalised credit costs of 83bps/80bps in FY13/14E vs 43bps in FY12.

� Expect 36% CAGR in earnings over FY12-14E: We forecast net profit CAGR of c.36% over FY12–14E driven by strong AUM growth (25% CAGR led by vehicle finance), stable margins and improving cost ratios (34bps over next 2 years). We expect CIFC to report ROA of c.1.7% and ROE of c.17.0% by FY14E.

� Initiate with BUY and TP of `̀̀̀220: We value CIFC at 1.5x Mar’14 BV (implied P/E of 10x) and arrive at Mar’13 TP of `220 (c.33% upside). Key risks: Significant slowdown in LCV resulting in slower growth and immediate requirement of tier I capital to 12%, leading to higher dilutions.

Cholamandalam Investment and Finance | CIFC IN

India | Banking & Financial Services | Initiating Coverage

Price: `165

BUY

Target: `220 (Mar’13)

12 June 2012

Amey Sathe, CFA [email protected]

Tel: (91 22) 6630 3027

Karan Uberoi, CFA, FRM [email protected]

Tel: (91 22) 6630 3082

Sanketh Godha [email protected]

Tel: (91 22) 6630 3080

Puneet Gulati [email protected]

Tel: (91 22) 6630 3072

Ravi Singh [email protected] Tel: (91 22) 6630 3058

Key Data

Market cap ` 21.5 / US$ 0.4

Shares in issue (mn) 132.6

Diluted share (mn) 132.6

3-mon avg daily val (mn) ` 5.4/US$ 0.1

52-week range ` 190.0/106.3

Sensex/Nifty 16,454/4,997

`/US$ 55.4

Daily Performance

Cholamandalam Investment

0

50

100

150

200

250

Oct

-10

Dec

-10

Feb

-11

Apr

-11

Jun-

11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Apr

-12

Jun-

12

-30%

-18%

-6%

6%

18%

30%

Cholamandalam Investment Relative to Sensex (RHS)

% 1M 3M 12M

Absolute -8.6 -2.7 3.2

Relative* -9.7 -0.3 12.3

* To the BSE Sensex

Shareholding Pattern (%) 4Q FY11 4Q FY12

Promoters 69.07 62.27

FII 8.09 16.96

DII 10.98 11.92

Public / others 11.86 8.85

JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters.

Please see important disclosure at the end of the report

Exhibit 1. Financial Summary (`̀̀̀ mn)

Y/E March FY10 FY11E FY12E FY13E FY14E

Net Profit 154 622 1,725 2,420 3,210

Net Profit (YoY %) -63.9% 303.3% 177.5% 40.3% 32.6%

Assets (YoY %) 0.1% 39.4% 38.7% 29.4% 21.3%

ROA (%) 0.22% 0.75% 1.49% 1.57% 1.67%

ROE (%) 3.2% 8.0% 13.9% 15.9% 16.7%

EPS (`) 2.3 5.2 13.0 18.2 21.4

EPS (YoY %) -63.9% 124.6% 149.8% 40.3% 17.3%

PE (x) 69.0 30.7 12.3 8.8 7.5

BV (`) 73 90 107 123 148

BV (YoY %) 1% 23% 19% 15% 20%

P/BV (x) 2.19 1.78 1.50 1.30 1.08

Source: Company data, JM Financial. Note: Valuations as of 11/06/2012.

CIFC 12 June 2012

JM Financial Institutional Securities Private Limited Page 2

Exhibit 1. Key Financials

Key Parameters FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E CAGR

(06-12)* CAGR

(12-14)E*

Balance sheet

Borrowings (` bn) 17 32 54 54 54 79 114 151 181 37.5% 25.6%

Loans (` bn) 19 33 55 46 55 86 123 161 197 36.6% 26.4%

Securitized (` bn) 2 7 17 15 14 5 11 10 14 31.0% 10.0%

AUM (` bn) 21 40 71 60 69 91 135 171 211 36.1% 25.1%

Total Assets ( `̀̀̀ bn) 21 37 64 69 69 97 134 174 211 36.2% 25.3%

Assets Growth (%) 21.8% 78.2% 70.1% 9.0% 0.1% 39.4% 38.7% 29.4% 21.3%

Income statement

NII (` bn) 1.1 2.2 5.1 5.0 4.1 5.9 7.6 10.2 12.7 38.9% 29.4%

Operating profits (` bn) 0.6 0.8 2.0 2.2 1.6 3.0 3.4 4.8 6.3 32.2% 35.7%

PAT (` bn) 0.4 0.3 0.6 0.4 0.2 0.6 1.7 2.4 3.2 30.3% 36.4%

Profitability

Interest Spread (%) 4.56% 6.66% 9.29% 6.15% 4.40% 6.27% 5.91% 5.96% 5.86% 1.35% -0.05%

NII / AUM (%) 5.91% 7.14% 9.18% 7.66% 6.30% 7.36% 6.70% 6.65% 6.64% 0.80% -0.06%

ROA (%) 1.84% 1.06% 1.18% 0.64% 0.22% 0.75% 1.49% 1.57% 1.67% -0.35% 0.18%

ROE (%) 11.4% 9.7% 13.4% 8.2% 3.2% 8.0% 13.9% 15.9% 16.7% 2.48% 2.79%

Asset Quality

Gross NPL (` mn) 236 229 572 2,576 4,499 2,727 1,176 1,704 2,275 30.7% 39.1%

Gross NPL (%) 1.24% 0.70% 1.04% 5.42% 7.73% 3.09% 0.95% 1.05% 1.14% -0.29% 0.20%

Net NPL (` mn) 124 138 150 597 1,201 339 369 256 341 19.9% -3.9%

Net NPL (%) 0.65% 0.42% 0.27% 1.31% 2.19% 0.39% 0.30% 0.16% 0.17% -0.35% -0.13%

Loan Loss Charge (` mn) 179 291 1,104 2,028 3,201 3,588 2,040 1,112 1,337 50.1% -19.0%

Coverage (%) 47.3% 40.0% 73.8% 76.8% 73.3% 87.6% 68.6% 85.0% 85.0% 21.3% 16.4%

Source: Company, JM Financial, Note: * Figures for ratios signify change over the specified period.

CIFC 12 June 2012


Cholamandalam Investment and Finance (CIFC)

� Focuses on rural/semi-urban and micro/small enterprises

Cholamandalam Investment and Finance (CIFC), a part of the Murugappa

Group (owns 62.3% as of 4Q12), provides vehicle finance, home equity and

business finance. The company also offers services of stock broking and

distribution of financial products. CIFC focuses on niche segment of

micro/small enterprises and self employed individuals (bottom of the pyramid)

in rural/semi–urban areas.

� Pan–India presence with c.90% branches in Tier-II and III Cities

Currently c.90% of CIFC’s branches are based in semi–urban and rural

locations (See Exhibit 3) where it has developed niche expertise being in the

business of vehicle finance for more than two decades. As of 4Q12, the

company had 375 branches across 21 states with c.90% branches in Tier III

and IV cities. CIFC has strong presence in Southern, Northern & Western

regions and growing presence in Eastern markets.

Exhibit 2. CIFC: Geography and Region-wise distribution network*

Semi - Urban

19%

Urban

10%

Rural

71%

North

26%

East

18%

West

24%

South*

32%

Source: Company, JM Financial. As of 4Q12 * Excludes 45 branches exclusively for gold loans set up in South.

� Eliminated non–core / unprofitable businesses and focused on core

business of vehicle finance

As part of business restructuring the company has eliminated non–core

activities, liquidated non-core assets and focused on its core business of

vehicle finance. The company a) in FY08, exited loss making personal loans

business b) in FY10, sold DBC Chola AMC business to L&T AMC for `450mn, c)

in FY11, terminated JV with DBS Bank and entire stake of 37.48% was acquired

by the parent i.e. Murugappa Group.

The company is also contemplating the future course of action for two of its

subsidiaries i.e. Chola Factoring and Chola Securities. Both these subsidiaries

were loss making in FY12.

CIFC 12 June 2012


Focus on secured/productive lines of business � Exited personal loans (unsecured lending) business in CY08; PL portfolio

to run–off by 1Q13

In FY06, CIFC entered a JV with DBS Bank to offer unsecured personal loans.

However, the company suffered significant delinquency and heavy losses in

the PL (small ticket) business. As part of business restructuring, in Sept’08,

the company exited unsecured personal finance business. The exposure was

also reduced by effective collection management, selling of assets on

assignment basis and increasing provisioning on all doubtful cases. CIFC

managed to bring down PL portfolio from `28.4bn in 1Q09 to `63mn in 4Q12.

As of 4Q12, personal loans were fully provided and expected to run off by

1Q13.

Exhibit 3. CIFC: Trend in personal loans (`̀̀̀ mn)

0

6,000

12,000

18,000

24,000

30,000

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

Persoanl Loans Portfolio (` mn)

Source: Company, JM Financial.

� Post PL segment exit, CIFC has de–risked its balance sheet by focusing on

productive end of the segment (rather than consumptive end)

Post exiting unsecured personal loans business, the company concentrated

solely on the productive/secured end of the segment than consumptive end

(personal loans). The company de-risked lending by operating on core

competencies of vehicle finance (with 2 decades of operating experience) and

consolidated its market with judicious expansion. CIFC also added home

equity (6 years of operating experience) to its product portfolio which has

negligible credit costs till now. Exhibit 6 gives detailed information about

CIFC’s main product lines.

� Consolidating vehicle finance (VF) business

During FY08-10, due to losses in PL portfolio, business of vehicle finance was

got neglected as complete focus was on PL recovery. However post exiting PL

business, the company renewed its focus on its core business of vehicle

finance and consolidated its position through judicious branch expansion,

competitive pricing and better control over asset quality.

CIFC 12 June 2012


Exhibit 4. CIFC: Change in AUM mix post business restructuring FY08

Vehicle Finance

47%

Home Equity

5%

Personal Loans

33%

Business

Finance

15%

FY12

Vehicle Finance

73%

Business

Finance

4%

Home Equity

23%

Gold Loans

0.3%


Exhibit 5. CIFC: Product portfolio

Vehicle Finance Home Equity Business Finance

Type of Loan

Provides vehicle financing for NEW

and USED HCVs, LCVs, SCVs, MLCVs,

MUVs , Tractors and Cars

Provides loans against residential

property to self employed

individuals

Provides loans against collateral of

equity shares, commercial/

residential property and

combination of current assets and

shares

Customer ProfileMicro & small enterprises and agri

based customer segmentSelf Employed Individuals

Promoters of large listed entities,

High Net worth Individuals, Retail

Broking clients

LTV (%) 75% - 80% 50% - 55% 50.00%

Ticket size (`̀̀̀ mn) ` 0.40 – 0.50 mn ` 4.00 – 5.00 mn ` 60 – 70 mn

Weighted IRR (%) 15% – 16% 13% – 14% 13% – 14%

Net Income Margin (%)* 7.7% 5.5% 3.8%

Credit losses as % of

average assets0.37% 0.23% 0.00%

Gross/Net NPLs (%) 0.69%/0.26% 0.81%/0.35% 1.21%/0.05%

Duration (months) 35 – 40 months 120 months 24 months

% of AUM 73% 23% 4%*

Source: Company, JM Financial. As of FY12; * CIFC has been reducing its business finance exposure.

CIFC 12 June 2012


Vehicle finance – Main driver of the growth

Vehicle finance is the company's largest business accounting for c.73% of

AUM. Traditionally, CIFC has strong presence in financing of CVs such as LCV

(market share of 17%), mini LCV (10%) and HCV (2%). The company also claims

to have market share of c.4% in used CVs (assuming Shriram Transport’s

market share of 25-30%) while PVs, cars and tractors account for a small

proportion.

Exhibit 6. CIFC: Market share as of FY12

17%

10%

2%

4%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%

LCV Mini LCV M&HCV Used CV*

Market Share in Vehicle Finance in FY12

Source: Company, JM Financial. * Assuming Shriram Transport’s market share of 25-30%

Over the years, vehicle finance business of the company has built significant strengths such as a) strong distribution with presence in 330 locations and deep penetration in Tier II and III towns, b) Strong dealer and manufacturer relationship with major product presence, and c) strong credit and recovery systems.

� Well diversified portfolio across geography & product segments

CIFC’s vehicle finance portfolio is well diversified product wise with LCV and

mini–LCV (constitutes 44% of FY12 VF–disbursement) and used CVs (29%)

dominating the asset mix. Similarly geography wise, vehicle finance portfolio

is well spread with Tamil Nadu (14% of FY12 disbursements), Maharashtra

(12%) and Andhra Pradesh (9%) dominating the geography mix. CIFC has no

exposure to mining in Karnataka; has c.1% in Orissa.

Exhibit 7. CIFC: Vehicle finance – AUM mix product wise and FY12 Disbursement mix region wise

26% 25% 24%

41% 41% 40%

10% 8% 9%

12% 14% 12%

10% 11% 12%3%

0%

20%

40%

60%

80%

100%

FY10 FY11 FY12

HCV LCV CAR & MUV Mini LCV 3Wheeler Shubh Tractor

MH

12%

AP

9%

RJ

9%Guj

8%

WB

8%

MP

7%

Punjab

6%

Kerala

6%

Delhi

5%

Chattisgarh

8%

Others

8% TN

14%


CIFC 12 June 2012


� Targets First time borrowers and avoids First Time Users

CIFC focuses mainly on First Time Borrowers (who are operating in the market)

and avoids First Time Users as credit costs are significantly higher in this later

segment. CIFC has c.65% of disbursements to micro and small enterprises and

agri based customer segment. Most CIFC’s customers enjoy high pricing

elasticity as these borrowers are not on contract basis and can pass on any

cost increase.

In used CV, CIFC targets vehicles with 2-3 years of vintage (c.14% of vehicle

finance portfolio) and 4-7 years of vintage (c.15% of vehicle finance portfolio).

Exhibit 8. CIFC: Business model and positioning in vehicle finance

First Time Users & Small Ticket Operators, older vehicles

HCV, LCV, MUV, Cars & SCV

Principal Operator

> 50 Vehicles

Large Operators 26-

50 vehicles

Medium Operators 10 -25 – HCV & LCV vehicles

SRTOs – HCV & LCV

R

I

S

K

R

A

T

E

S

HIGH HIGH

LOW LOW

~65% of disbursements

are to micro & small

enterprises and agri

based customer segment

Chola positioning

•Middle of the pyramid through

New CVs, Used CVs & MUVs

•Top of the Bottom of the pyramid

through SCV & older CVs 'Shubh'


� Origination of vehicle loans through – ‘Prime’ and ‘Shubh’ segments

The company originates its vehicle finance loans under two segments – Prime

and Shubh.

• The Prime segment relates to the financing of new and used (less

than five years old) auto and commercial vehicles to customers with a

favourable repayment track record.

• The Shubh segment is for customers who are purchasing relatively

older vehicles (more than five years old) and are either new to

borrowing or have a limited payment history.

Credit costs of 0.75%

Credit costs of 2.50%

CIFC 12 June 2012


Light commercial vehicle customers are sourced through dealers and

preferred financier agreements with major manufacturers and heavy

commercial vehicles are sourced via transport operators. Used and old

vehicles customers are sourced using own (CIFC) distribution.

� Financing of used CVs is less cyclical and is gathering pace…

Used CV finance market includes financing availed at the time of purchasing a

used vehicle as well as refinance taken with the CV as collateral (normally for

2-3 years of vintage). Given the penetration in used CV finance, growth in the

used CV financing market is less-cyclical in nature, while in the new CV

financing market growth is highly cyclical which is linked to GDP growth.

Exhibit 9. CIFC: Strong growth in CV sales during FY03-07 and FY10-12 to benefit CIFC

0

200,000

400,000

600,000

800,000

1,000,000

FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

MHCV LCV

FY03-07: Period of very high

growth (Vintage 4-7 years)

FY10-12: Period of very

high growth (Vintage 2-3

years)

Will be up for refinancing

as used CVs in FY12-

FY14E


� … While LCV growth cycle to continue

The growing popularity of the hub-and-spoke distribution model and rising

importance of small transporters’ role in the road freight process is driving the

demand for new min LCV / LCV in cities and semi-urban areas. CRISIL

estimates LCV segment to witness CAGR of 14-16% up to 2016-17, of which

min LCV sales are expected to post a CAGR of 15-17%. Our Auto team also

expects 12-15% growth in LCV segment for FY13E.

We believe up–tick in used CV financing and continued growth trend in LCV

market favors CIFC as a) in both segments, CIFC has been gaining market

share, b) significant additions to branches will aid in improving market share,

c) low base.

� Home Equity (HE) to constitute c.20% of AUM: Started in fiscal FY07, Home

Equity is a relatively new segment for the company. It has witnessed strong

growth (loan CAGR of 55% over FY08-12) and now constitutes 23% of AUM (1%

in FY07). The company focuses on the relatively less-riskier self-occupied

residential property segment which comprises 85-87% of the total home equity

portfolio while 99% of the customers are self employed individuals.

E.g. The first lot of Tata Motors Ace of 30,000-40,000 units has completed almost 5-6 years. The vehicles are now available in the used market, which is getting good demand from rural consumers.

CIFC 12 June 2012


Well positioned to deliver growth through network expansion, product additions and market share gains

� Vehicle finance, being a primary driver of growth, is expected to drive 25%

CAGR in AUM over FY12-14E

We believe CIFC is well positioned to deliver 25% CAGR in AUM through a)

distribution network expansion, b) market share gains in LCV and used CV

financing market, and c) product additions. We expect vehicle finance to

remain primary driver of growth over next 2 years (to constitute 70-75% of

AUM) and home equity to contribute 18-20% to AUM, while gold loans and

business finance to constitute rest 4-5% of AUM.

Exhibit 10. CIFC: AUM (`̀̀̀ bn) and YoY growth (%)

60 69

91

135

171

211

0

50

100

150

200

250

FY09 FY10 FY11 FY12 FY13E FY14E

-25%

-10%

5%

20%

35%

50%AUM (` bn) YoY Growth (%)


� Distribution network expansion with pan–India presence to deliver growth

over next 2–3 years

We compare strategy adopted by Shriram Transport (SHTF) and M&M Financial

Services (MMFS) as they expanded their distribution network and reach which

helped them achieve strong growth rates. During FY04-09, SHTF recorded 70%

CAGR in AUM (including merger of Shriram Investments) as it increased its

branch network to 479 from 179 in FY04. Similarly in case of MMFS, it

witnessed 38% CAGR in AUM in FY09-12 during which its branch network

increased to 607 vs 436 in FY09.

Exhibit 11. CIFC: Trends in branches and AUM growth rate for SHTF and MMFS

0

120

240

360

480

600

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

0%

30%

60%

90%

120%

150%

SHTF - Branches AUM - YoY Grow th (%)

0

125

250

375

500

625

FY07 FY08 FY09 FY10 FY11 FY12

0%

10%

20%

30%

40%

50%

MMFS - Branches AUM - YoY Grow th (%)


CIFC 12 June 2012


Exhibit 12. CIFC: Trend for SHTF in branches and AUM YoY growth (%)

250

320

390

460

530

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

0%

14%

28%

42%

56%

70%

SHTF - Branches AUM YoY Grow th (%)

Source: Company, JM Financial. * Not considered SHTF’s associate companies distribution network

Exhibit 13. CIFC: Trend for MMFS in branches and AUM YoY growth (%)

250

320

390

460

530

600

670

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

4Q12

0%

10%

20%

30%

40%

50%

60%

MMFS - Branches AUM YoY Grow th (%)


We believe CIFC is well positioned to follow such strategy of expanding branch

network aggressively to increase its footprint and create a pan–India presence.

Going forward, we expect CIFC to focus on broadening as well as deepening

its distribution network. Incremental branch additions (125 in FY13E and 100

in FY14E) should also improve product penetration and aid AUM growth.

In case of SHTF, AUM growth slowed down significantly as branch additions remained stagnant.

In case of MMFS, AUM growth continues to remain strong mainly driven by aggressive branch expansion done in last 24 months (added 148 branches in last 2 years).

CIFC 12 June 2012


Exhibit 14. CIFC: Quarterly and annual Trend in branches and AUM YoY growth (%)

0

125

250

375

500

625

FY09 FY10 FY11 FY12 FY13E FY14E

-25%

-10%

5%

20%

35%

50%

CIFC - Branches AUM YoY Grow th (%)

0

125

250

375

500

625

3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

25%

30%

35%

40%

45%

50%

CIFC - Branches AUM YoY Grow th (%)


� Gaining market share in LCV and used CV market

We expect CIFC to gain market share in LCV as well as used CV market due to

a) broader and deeper market penetration (opened 159 vehicle finance

branches in last 2 years and plans to open 225 over next 2 years), b)

competitive pricing as rates offered by CIFC are lower than the market leader

in used CV market, c) newly opened branches are likely to contribute more to

incremental business as and when they mature.

The company has already gained market share in LCV which stood at 16.9% in

FY12 vs 12.1% in FY10. Similarly in mini–LCV, its market share stood at 10.0%

in FY12 vs 8.9% in FY10 while in M&HCV, the company had market share of

2.4% in FY12 vs 1.8% in FY10. The company also claims c.4% market share in

used CV market (assuming SHTF has 25-30% market share). We expect market

share gain trends to continue for CIFC over next 2 years.

Exhibit 15. CIFC: Trend in market share

9%

2%

12%

10%

2%

15%

10%

2%

17%

0%

4%

8%

12%

16%

20%

Mini LCV M&HCV LCV

FY10 FY11 FY12


CIFC 12 June 2012


� Expanding product portfolio by introducing new product lines

CIFC introduced tractor financing in 1Q12 which now constitutes 4% of Vehicle

Finance AUM (3% of total AUM). Currently only 25-30 branches offer tractor

financing as the company has been conservative on rolling out that product. In

FY13, around 125-150 branches will start offering tractor financing and

consequently it will be ramped up. Thus the company expects tractor finance

to constitute 10% of vehicle finance AUM in next 2 years.

Exhibit 16. CIFC: Vehicle finance – Disbursement mix as of FY11 and FY12

LCV

36%

HCV

16%

Mini LCV

14%

MUV

4%

Used CV's

27%

Car & 3

Wheelers

3%

LCV

33%

HCV

15%

Mini LCV

11%

MUV

5%

Tractor

4%

Car & 3

Wheelers

3%

Used CV's

29%


CIFC has also opened 45 branches exclusively for gold loans in South India

and has started the disbursements (4Q12: 0.3% of AUM and 2% of

disbursements). The company follows stricter valuation norms which are

consistent with RBI’s regulations (such as considering only gold part of the

ornaments for lending purpose).

The company is evaluating new lines of businesses such as farm equipments,

wherein its relationship with its associate company EID Parry can be used, SME

Loans and line extensions such as utility vehicles (in vehicle finance) and

housing loans (home equity).

Exhibit 17. CIFC: Trend in AUM mix (%)

58%47% 51% 57%

66% 73%

5%

12%

21%

24%23%

22%

15%6%

7%

9%4%

19%33% 31%

14%2%

1%

0%

20%

40%

60%

80%

100%

FY07 FY08 FY09 FY10 FY11 FY12

Vehicle Finance Home Equity Business Finance Gold Loans Personal Loans


FY11 FY12

CIFC 12 June 2012


Factoring stable margins (NII/AUM) leading to 28% CAGR in NII over FY12-14E

� Increasing reliance on banks as source of funding

Over the years CIFC has increased its reliance on bank borrowings which now

(FY12) constitute c.63% of total borrowings vs c.35% in FY06. Consequently,

dependence on debentures has come down to 22% in FY12 from 38% in FY06

(went up to 62% in FY07). The company is also increasing proportion of

floating rate borrowings (partly aided by increasing reliance on banks

borrowings which is linked to base rate and floating) which was 54% in FY12

vs 16% in FY09.

Exhibit 18. CIFC: Trend in borrowings composition and borrowings profile

35% 32%23%

37%

63% 69% 63%

38%62% 52%

33%9% 13%

22%

0%

20%

40%

60%

80%

100%

FY06 FY07 FY08 FY09 FY10 FY11 FY12

Bank Loans Commerical Paper Debentures Subordinated Debt & PDI

16% 9%

41%54%

84% 91%

59%46%

0%

20%

40%

60%

80%

100%

FY09 FY10 FY11 FY12

Floating (%) Fix ed (%)


As of FY12, CIFC had c.43% of borrowing linked to base rate or base rate +

spread (0.5% to 1.5%). In declining interest rate environment (where base rates

of banks come down), CIFC stands to benefit due to re–pricing of liabilities as

its assets side is locked at fixed rate.

Exhibit 19. CIFC: Composition of FY12 borrowings

Base Rate

19%

Fix ed Rate

9%

Others

40%

Fix ed rate / base

rate w hichev er is

higher

4%

USD LIBOR +

Spread

4%

Base Rate +

Spread

(0.5% to 1.5%)

24%


CIFC 12 June 2012


� ‘AFC’ status and credit rating improvement should aid in managing

borrowing cost

In 1Q12, CIFC regained its status of an ‘Asset Financing Company' (AFC) from

‘Loan Company’ (LC). In order to classify as an AFC, 60% of the advances

should be lending towards financing of physical assets supporting

productive/economic activity. Companies with ‘AFC’ status enjoy significantly

lower risk weightage (30% for AA rated company) than Loan companies (100%

risk weight). Post AFC status, CIFC is expected to get lower rate on its

incremental borrowings.

In Nov’11, ICRA upgraded NCD rating of CIFC to ‘AA’ from ‘AA-‘, while in

FY11, CRISIL upgraded the company’s short term debt rating from P1 to P1+.

With improving financials and robust growth outlook, CIFC is likely to witness

further improvement in credit rating.

Hence, we expect regaining of AFC status and improvement in credit rating to

help CIFC lower its incremental borrowing costs.

� However, continuing uncertainty over securitisation will lead to lower

proportion of off–balance sheet AUM

The company has been using assignment purely as funding tool and reliance

on the same has been minimal. RBI’s guidelines on securitisation have resulted

in uncertainty over structuring of securitisation/assignment transactions. Thus

we factor in lower proportion of off–balance sheet AUM over next 2 years

(FY14: off–balance sheet AUM of 6.5% vs 8.5% in FY12).

However, CIFC has one of the lowest proportions of off–balance sheet AUM as

compared to its peers.

Exhibit 20. CIFC: Trend in off–balance sheet AUM proportion and comparison with peers

11%

18%

24% 24%

20%

6%

8%

6% 7%

0%

6%

12%

18%

24%

30%

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

Off–balance sheet AUM proportion (%)

8%

45%

15%

20%

0%

10%

20%

30%

40%

50%

CIFC SHTF MMFS SCUF

Off–balance sheet AUM proportion (%)


CIFC 12 June 2012


� We expect stable margins (NII/AUM) leading to 29% CAGR in NII over

FY12-14E

In a declining interest rate environment, CIFC will benefit in two ways a) With

relatively large fixed-rate book (vehicle finance (73% of AUM) is at fixed rate),

CIFC is well positioned to do well, b) c.63% of borrowings are from banks

while c.43% is linked to base rate. Thus decline in base rate of the banks, will

help CIFC lower its borrowing cost incrementally.

However, the positive impact from this will be negated as a) CIFC has c.`15bn

of on–balance sheet priority sector borrowings (13% of total borrowings) which

were taken prior to FY12 and are below base rate. These borrowings are likely

to be replaced at base rates which will lead to higher cost of funds (impact of

13-18bps), b) assumption of lower off–balance sheet AUM post new guidelines

on securitisation.

Thus we expect stable margins (NII/AUM of c.6.6% by FY14E) leading to 29%

CAGR in NII over FY12-14E.

Exhibit 21. CIFC: Trend in NII growth and margins

1.12.2

5.1 5.04.1

5.9

7.6

10.2

12.7

0.0

3.0

6.0

9.0

12.0

15.0


-25%

10%

45%

80%

115%

150%

NII (` bn) YoY Growth (%)

5.9%

7.1%

9.2%

7.7%

6.3%

7.4%

6.7% 6.7% 6.6%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%


NII / AUM (%)


CIFC 12 June 2012


Operating efficiencies to kick–in by FY14E; expect 34bps decline in cost ratios over next 2 years

In the past, CIFC operated at elevated levels of cost ratios given a) the

company was running personal loans recovery efforts (especially in FY07-09

period) which was not having any positive top line impact, b) significant

expansion in distribution network by adding 159 branches and c.3,300

employees in last 2 years, c) the company also opened 45 branches

exclusively for gold loans which are not yet yielding expected results, d) it

also invested significantly in technology wherein cost is incurred and booked

immediately but benefits follow with a lag.

Exhibit 22. CIFC: Trend in cost to assets

4.9%

3.1% 3.0%

4.9%

6.2%

4.6%

3.9% 3.8% 3.8%

0.0%

1.6%

3.2%

4.8%

6.4%

8.0%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

Cost to Assets (%)


CIFC has been expanding its branch network mainly into Tier 3 and 4 towns

and rural areas which will help deeper market penetration and expand market

space. In FY13, the company will be adding 125 branches and another 100

branches in FY14. The company also intends to become national player with

strong presence in southern, northern and western markets.

Exhibit 23. CIFC: Trend in branch and employee additions

180

275

140171

226

375

500

600

0

140

280

420

560

700

FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E

0

2,000

4,000

6,000

8,000

10,000

12,000

Branches Employ ees


Cost to assets was at significantly higher levels as compared to its peers. Period of FY07-09 was characterised by higher cost to assets mainly due to personal loans recovery efforts

CIFC is adding branches mainly in tier III and tier IV cities all over India. CIFC will be focusing on broadening as well as deepening its distribution network.

CIFC 12 June 2012


Exhibit 24. CIFC: Branch network – Pan India presence


� We expect operating efficiencies to kick in by FY14E; expect 34bps

improvement in cost ratios over next 2 years

We expect CIFC to benefit from the investments made/making in its

distribution network to start flowing in over next 2 years. We expect the

improvement in cost ratios to be led by

a) Improving branch productivity leading to decline in cost ratios:

Although CIFC will continue to expand its branch network, going forward,

cost of opening new branches will be offset by old branches becoming

profitable. 60-70% of branches added last year will start becoming

profitable as average break–even period is 6-7 months per branch.

The company categorizes its branches into, A, B, C, D, E branches based

on the size and scale and the complexity of the branch. When a new

branch is opened it is in the ‘E’ category. As and when ‘E’ category branch

gains specific size, it moves to ‘D’ category and then ‘C’ and henceforth.

CIFC is witnessing migration of branches to ‘D’ category from ‘E’ category,

indicating improving productivity. Consequently proportion of ‘D’ category

branches has gone up to 44% in FY12 from 41% in FY10.

CIFC is no longer a regional player and has established strong presence in southern (32% of branches excl. gold loans), northern (26%) and western (24%) markets.

CIFC 12 June 2012


Similarly category ‘C’/’D’ proportion stood at 3.8%/8.7% respectively in

FY12 vs 2.6%/6.6% in FY10 while category ‘E’ witnessed decline to 42% in

FY12 from 47% in FY10. We expect similar trends to continue in coming

years.

Exhibit 25. CIFC: Trend in branch productivity

7% 11% 9%

41% 40% 44%

47% 46% 42%

0%

20%

40%

60%

80%

100%

FY10 FY11 FY12

A B C D E


b) Introduction of technology to improve employee productivity: The

company has been investing heavily in technology which is expected to

improve productivity in coming years. The company has already rolled

pilot project in 8-10 branches and is expected to cover 60 branches more

by FY13 and 150 branches by FY14. The company is already witnessing

improved productivity e.g. earlier one employee used to do 6 customer

cases per month now same employee is doing 9 cases per month.

c) Absence of PL portfolio which has been 100% provided and already run off

(remaining `63mn is expected to run–off by 1Q13).

Thus we believe improvement in cost to assets will be one of the important

drivers for CIFC and expect 34bps improvement in cost to assets over next 2

years (FY12-14E).

Exhibit 26. CIFC: Trend in cost ratios

3.0%

4.9%

6.2%

4.6%

3.9% 3.8% 3.8% 3.6% 3.4%

0.0%

1.6%

3.2%

4.8%

6.4%

8.0%


Cost to Assets (%)

48%

65%

61%58%

63%

51%

56%53%

51%

30%

40%

50%

60%

70%

80%


Cost to Income Ratio (%)


CIFC is witnessing significant migration from category ‘E’ branches to category ‘D’, ‘C’, and ‘B’, etc. indicating improvement in branch productivity

CIFC 12 June 2012


Current credit costs are at historical low levels; we factor credit costs of 80bps over FY12-14E vs 43bps in FY12

� Personal loan portfolio was a drag on asset quality

Personal Loan as a product was introduced as a new segment during JV with

DBS in 2006. Due to significantly higher delinquencies in PL segment, the

company decided to discontinue its personal loan business within 2 yrs of

operation. However losses in personal loan portfolio continued and were the

biggest drag on CIFC’s profitability during FY08-11 period. Losses in PL

resulted in substantially higher credit costs for CIFC (more than 80% of total

credit costs) in FY08-11. With focus on recovery and selling down of portfolio,

woes of personal loans are very much behind.

Exhibit 27. CIFC: Trend in credit costs (`̀̀̀ mn) and LLP (%)

937

2,719 2,980

1,302

-259

347

661634

943

310

-500

500

1,500

2,500

3,500

4,500

FY08 FY09 FY10 FY11 FY12

PL Non-PL

1.5% 1.7% 1.5%

1.1% 1.1%

2.5%

4.1%

2.4% 2.5%

0.2%*

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12

LLP (%)

Source: Company, JM Financial. * Excluding PL recoveries, LLP was 43bps.

� However net credit losses for core business i.e. vehicle finance and home

equity have been stable

Despite reporting elevated levels of LLP during FY08-10 period, asset quality

trends in the company’s core business i.e. vehicle finance and home equity

were stable. CIFC reported net credit losses of 1.9% in FY09 for vehicle finance

which now stand at 0.2% in FY12.

Exhibit 28. CIFC: Trend net credit losses for vehicle finance and home equity

1.1%

1.9%

1.3%

0.5% 0.4%0.2%0.2%

0.4%

0.0% 0.1%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

FY08 FY09 FY10 FY11 FY12

Vehicle Finance Home Equity


Despite facing asset quality issues in the personal loan segment, CIFC managed to keep credit losses of its core vehicle-finance business under check.

CIFC 12 June 2012


� Current credit costs are running at historical low levels; factoring in

normalized credit costs of 80bps over next 2 years

In FY12, CIFC had credit costs of 43bps on its non–PL portfolio (i.e. vehicle

finance and home equity etc.; including PL recoveries, LLP stood at 17bps in

FY12). CIFC is enjoying benign asset quality and its current credit costs are at

historical low levels. Going forward, while expect asset quality to remain

healthy, we factor normalized credit costs of 83bps/80bps in FY13/14E vs

43bps in FY12. We expect gross NPLs of 1.1% in FY14E (vs 0.9% in FY12) with

coverage ratio of 85% in FY14E (vs 69% in FY12).

Exhibit 29. CIFC: Trend in asset quality

0.7%1.0%

5.4%

7.7%

3.1%

0.9% 1.0% 1.1%1.2%

0.0%

1.8%

3.6%

5.4%

7.2%

9.0%


0%

20%

40%

60%

80%

100%

Gross NPLs (%) Net NPLs (%) Cov erage (RHS) (%)

1.1% 1.1%

2.5%

4.1%

2.4% 2.5%

0.8% 0.8%

0.2%*

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%


LLP (%)

Source: Company, JM Financial. In FY12, CIFC had LLP of 43bps for non PL portfolio

Expectation of stable asset quality trends can be attributed to sound risk

management policy of the company. Key features are as follows:

� The company has separate sales, credit and collection functions, but staff

from one function is also assessed based on the performance of the other

functions which creates a commonality of objective in the organisation.

� CIFC closely monitors all loans which have not paid for 60 days past the due

date during the first 18 months of the loan disbursement date using an Early

Default (ED) report which allows the company to distinguish between accounts

that require more collection effort and attention. (Source: Fitch Rating)

� In case of a sales officer, the incentives are not only a function of volumes

generated but also a function of portfolio performance so as to incentivize

good quality of business origination. Similarly credit officers are not only

incentivised based on the quality of the portfolio but also on the amount of

disbursements achieved.

� The use of early default (ED) report, which allows the company to distinguish

between accounts that require more collection effort and attention thereby

acting as an early warning signal to help manage any surge in delinquencies.

� The use of viability reports to assess each customer along with a detailed

credit policy on each asset class, customer type and region does not allow for

much divergence in credit appraisal.

� CIFC has well–spread portfolio in terms of product category as well as

geography leading to diversification of risk. The company has no mining

exposure in Karnataka while it expects c.`200mn of Orissa exposure at risk.

CIFC 12 June 2012


Factoring `̀̀̀3.0bn equity dilution in FY14E

� Equity dilution to support growth and to comply with Usha Thorat

Committee requirement

In terms of core tier I equity capital, CIFC has the lowest core tier I equity ratio

of 7% (including perpetual debt, Tier 1 at 11%) amongst its peers. We have

factored equity dilution of `3.0bn (13% dilution) in FY14 mainly to support

growth as well as to comply with Usha Thorat Committee’s requirement of tier

I capital of 12%. However if Usha Thorat Committee mandates immediate

increase of tier I to 12% (as against the expectation of 3 year window to

comply with 12% of tier I requirement), it may lead to further dilution.

We estimate CIFC to have core tier 1 capital of 8.4% (including perpetual debt,

tier I of 10.9%) and CAR of 16.4% by FY14E.

Exhibit 30. CIFC: Peer comparison for core Tier I and Trend in capital adequacy

7%

17%

15%13%

0%

5%

10%

15%

20%

CIFC SHTF MMFS SCUF

FY12 Core Tier I Ratio (%)

14.8%

8.2% 8.4%10.2% 9.5% 9.1%

7.1% 6.7%8.4%

14.8%

12.3% 12.4%

15.1% 14.8%

16.7%18.1%

15.7% 16.4%

0.0%

4.0%

8.0%

12.0%

16.0%

20.0%


Core Tier I Capital (%) Perpetual Debt (%) Tier II (%)


Apart from capital, insignificant impact of regulatory changes

� Minimal impact of regulatory changes except increase in tier I capital to

12% if implemented instantly (against expectation of 3 year window)

Over the last 12 months, RBI has come up with several guidelines and draft

papers discussing changes in regulatory environment of NBFCs. Most of these

guidelines revolved around key issues such as a) Securitization, b) PSL status

withdrawal for loans (e.g. gold loans), c) Higher capital adequacy

requirements, d) Change in NPL recognition from 180 days to 90 days.

CIFC will not be significantly impacted by changes in securitization guidelines

given minimal reliance on securitization it undertakes. Change in NPL

recognition from 180 to 90 days will result in 40bps increase in gross NPLs

proportion (from current levels of 1% gross NPLs), however ultimate credit

costs over the life of the product will not change in our view.

CIFC 12 June 2012


Earnings CAGR of 36% over FY12-14E

� Expect earnings CAGR at c.36% over FY11-14E driven by strong AUM

growth, stable margins and improving cost ratios

We forecast net profit to witness c.36% CAGR over FY12–14E driven by strong

AUM growth (25% CAGR led by vehicle finance), stable margins and improving

cost ratios (34bps over next 2 years). We expect CIFC to report ROA of c.1.7%

and ROE of c.17.0% by FY14E.

Exhibit 31. CIFC: Trend in return ratios

0.4 0.30.6

0.40.2

0.6

1.7

2.4

3.2

0.0

0.7

1.4

2.1

2.8

3.5


-100%

0%

100%

200%

300%

400%Net Profit (` bn) YoY Growth (%)

0.0%

0.4%

0.8%

1.2%

1.6%

2.0%


0%

4%

8%

12%

16%

20%

ROA (LHS) (%) ROE (%)


CIFC 12 June 2012


New management and well–defined organisation structure has led the turnaround

� Successful turnaround of the company by New management

The management team led by Mr. Vellayan Subbiah (joined the company in

Aug’10) has been entrusted with turnaround of the company and build a

sustainable growth model for CIFC. CIFC enjoys very low employee turnover as

compared to industry standards on account of an initiative to promote people

from within the Organization.

Exhibit 32. CIFC: Management Profile

Name Designation Profile

Mr. Vellayan Subbiah Managing Director

– Was the Managing Director of Laserwords, a leading provider of pre-

press services to global publishers since 2005

– Professional experience includes 6 years at McKinsey and Company,

Chicago and associations with 24/7 Customer Inc. Las Gatos and The

Carlyle Group

Mr. Kaushik Banerjee President – Asset Finance

– Has been in Asset Finance business for close to 22 years

– Joined CIFC in 2001 and took over as SVP of the Vehicle Finance vertical

in 2006

– Earlier headed the West & East operations of Esanda Finanz Ltd (a

subsidiary of ANZ Grindlays Bank)

Mr. Rohit Phadke Sr. VP & Business Head – Home Equity

– Has 20 years of experience in Asset Financing

– Has been with CIFC for 8 years and earlier had led the West Zone of the

Vehicle Finance Business

Mr. Arul Selvan Sr. Vice President & CFO

– With over 20 years of experience in Finance and Accounts, he heads the

Finance function of CIFC as the CFO.

– Has spent 19 years with the Murugappa Group, with stints in Tube

Investments, Corporate Strategic Planning Division of Murugappa Group,

Cholamandalam Mitsui Sumitomo General Insurance, and Group

Corporate Finance of Murugappa Group.


CIFC 12 June 2012


Initiate coverage with BUY and TP of `̀̀̀220

� Initiate coverage with BUY and TP of `̀̀̀220

We value CIFC at 1.5x Mar’14 BV (implied P/E of 10x), implying Mar’13 target

price of `220, upside of 33% from current levels.

Exhibit 33. CIFC: One-year forward P/BV (x) and One-year forward PE (x)

0.0

1.0

2.0

3.0

4.0

5.0

Mar-03 Oct-04 Apr-06 Nov-07 May-09 Nov-10 Jun-12

Fw d. P/BV (x )

0

10

20

30

40

50

Mar-03 Oct-04 Apr-06 Nov -07 May -09 Nov -10 Jun-12

Fw d. PE (x )

Source: Bloomberg, Company, JM Financial.

CIFC: Peer Comparables: Valuation table

PAT CAGR

FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12E FY13E FY14E FY12-14E (%)

CIFC 107 123 148 13.0 18.2 21.4 1.5% 1.6% 1.7% 14% 16% 17% 1.5 1.3 1.1 12.7 9.1 7.7 36.4%

SHTF 265 316 373 55.6 60.4 67.2 3.7% 3.5% 3.4% 23% 21% 20% 2.0 1.6 1.4 9.3 8.6 7.7 10.0%

MMFS 287 342 407 60.4 74.8 88.7 3.8% 3.7% 3.5% 23% 24% 24% 2.2 1.9 1.6 10.5 8.5 7.2 21.2%

SCUF 330 404 492 65.4 85.9 98.7 3.1% 3.1% 3.0% 23% 23% 23% 1.8 1.5 1.2 9.3 7.1 6.2 29.6%

Peer

Comps

ROA (%) P/EBVPS ( `̀̀̀) EPS ( `̀̀̀) ROE (%) P/B

Source: Bloomberg, Company, JM Financial.

CIFC 12 June 2012


CIFC: ROE Tree

� Healthy return ratios: We expect CIFC to generate ROA of c.1.7% and ROE of

c.17% by FY14E driven by strong AUM growth, improvement in cost ratios and

stable credit costs.

Exhibit 34. CIFC - Normalised earnings (%) FY08 FY09 FY10 FY11E FY12E FY13E FY14E

Net Margin (as % of avg. IEA) 10.39% 7.88% 6.13% 7.54% 6.99% 6.93% 6.87%

NIM (as % of avg. Assets) 10.11% 7.59% 5.85% 7.08% 6.55% 6.60% 6.59%

Core Non-IR/Asset 0.00% 0.08% 0.04% 0.11% 0.09% 0.08% 0.07%

Core Non-IR/Revenues 0.0% 1.1% 0.7% 1.6% 1.4% 1.1% 1.0%

Core Revenue / Assets 10.11% 7.67% 5.89% 7.19% 6.65% 6.68% 6.66%

Cost/ Core Income 61.0% 60.1% 66.1% 52.9% 56.9% 54.0% 51.8%

Cost/Assets 6.17% 4.61% 3.89% 3.81% 3.78% 3.60% 3.44%

Core operating Profits 3.94% 3.06% 2.00% 3.39% 2.87% 3.07% 3.21%

LLP/Loans 2.54% 4.05% 2.43% 2.49% 0.17% 0.83% 0.80%

Loans/Assets 86.4% 75.3% 72.4% 84.8% 90.6% 92.4% 93.2%

Profits/Provisions on Sect. -0.05% -0.25% -0.21% -0.22% -0.09% -0.07% -0.06%

Pre-Tax 1.80% 0.26% 0.45% 1.49% 2.80% 2.38% 2.53%

Effective Tax Rate 34.7% -150.2% 50.8% 36.9% 39.7% 34.0% 34.0%

ROA 1.18% 0.64% 0.22% 0.94% 1.69% 1.57% 1.67%

Equity / Assets 8.76% 7.82% 6.96% 9.37% 10.78% 9.90% 10.03%

RoE 13.4% 8.2% 3.2% 8.0% 13.9% 15.9% 16.7%

Source: Company, JM Financial

CIFC 12 June 2012


Key risks

� Significant economic slowdown in LCV growth cycle: Significant economic

slowdown resulting in slow down in LCV growth cycle is a key risk (52% of

vehicle finance AUM is LCV) and could lead to slower growth and impact CIFC’s

earnings adversely. Further, it may result in deterioration in asset quality and

could adversely affect the company’s profitability.

� Immediate requirement of tier I capital of 12% may lead to further

dilutions: Usha Thorat committee has suggested tier I capital of 12% for

NBFCs. It is expected that NBFCs will be given 3 year window to achieve the

same. However if same is implemented instantly, there will be further

dilutions.

� Spike in interest rates: Being a wholesale funded institution, any sustained

liquidity shock could impact the spreads adversely and affect profitability.

Company background

� Cholamandalam Investment & Finance Company Limited (CIFC) was

incorporated in 1978 as the financial services arm of the Murugappa Group.

The company started off with asset financing in South India and subsequently

widened its geographical presence to gradually cover Northern and Western

India. While CIFC initially had a strong presence in the equipment finance to

the mid-size corporate market, in the mid-1990s the company entered the

vehicle financing business. In FY10, after DBS exited the joint venture, the

name was changed back to CIFCL from Cholamandalam DBS Finance Ltd. The

company operates from 375 branches across 21 states in India and has

traditionally been a specialised commercial vehicle provider for the first-time-

borrower, small road transport operators and SME segments.

Shareholding Pattern

Exhibit 35. CIFC: 4Q12 Shareholding pattern

IFC

9%

Amansa

3%

Others

14%Aquarius

2%

Creador PE

5%

Multiples PE

5%

Murugappa

Group

62%


CIFC 12 June 2012


Timeline

Exhibit 36. CIFC: Company timeline

Cholamandalam Investment and Finance

1978

Commenced Equipment Financing

2007

Commenced Home Equity Business

1992

Commenced Vehicle Finance Business

2008

Exited Consumer

Finance Business

1994

Started

Chola Securities

2009

Sold AMC

Focus on Secured

Lending Lines

(Vehicle Finance,

Home Equity &

Business Finance)

1996

Started Chola Asset

Management Company

2010

JV with DBS

terminated

Additional Capital

infusion of

`2500mn by IFC & other PE Investors

2011

PL Book Provided,

AFC Status

Rating Upgrade

from ICRA,

Launch of Tractor

and Gold Loans

2012

Infusion of Equity

share capital of

` 2120mn

2000

Started

Chola

Distribution

2005

JV with DBS

2006

Commenced Consumer Finance

Cholamandalam Investment and Finance

1978

Commenced Equipment Financing

2007

Commenced Home Equity Business

1992

Commenced Vehicle Finance Business

2008

Exited Consumer

Finance Business

1994

Started

Chola Securities

2009

Sold AMC

Focus on Secured

Lending Lines

(Vehicle Finance,

Home Equity &

Business Finance)

1996

Started Chola Asset

Management Company

2010

JV with DBS

terminated

Additional Capital

infusion of

`2500mn by IFC & other PE Investors

2011

PL Book Provided,

AFC Status

Rating Upgrade

from ICRA,

Launch of Tractor

and Gold Loans

2012

Infusion of Equity

share capital of

` 2120mn

2000

Started

Chola

Distribution

2005

JV with DBS

2006


2006


Source: Company, JM Financial. All are calendar years

CIFC 12 June 2012


Financial Tables (Standalone)

Profit & Loss (`̀̀̀ mn)

Y/E March FY10 FY11 FY12 FY13E FY14E

Net Interest Income (NII) 4,057 5,883 7,571 10,167 12,670

Non-Interest Income 203 279 213 227 243

Total Income 4,259 6,161 7,784 10,394 12,913

Operating Expenses 2,699 3,165 4,368 5,550 6,623

Pre-provisioning Profits 1,560 2,996 3,416 4,844 6,290

Total Provisions 1,247 1,755 181 1,177 1,426

PBT 313 1,241 3,236 3,667 4,864

Tax 159 458 1,286 1,247 1,654

PAT (Pre-Extra ordinaries) 154 783 1,950 2,420 3,210

Extra ordinaries (Net of tax) 0 -161 -224 0 0

Reported Profits 154 622 1,725 2,420 3,210

Dividend 114 212 312 265 315

Retained Profits 40 570 1,638 2,155 2,895


Balance Sheet (`̀̀̀ mn)


Capital 665 1,194 1,326 1,326 1,500

Reserves and Surplus 4,185 9,526 12,847 15,002 20,723

Convertible Warrants 0 0 0 0 0

Share holders equity 4,850 10,720 14,173 16,328 22,223

Preference Share 3,000 0 0 0 0

Stock Option O/s 0 0 0 0 0

Borrowed Funds 53,936 79,453 114,441 150,719 180,561

Deferred tax liabilities 0 0 0 0 0

Current Liabilities 7,626 6,610 5,612 6,689 8,010

Total Liabilities 69,412 96,783 134,226 173,735 210,794

Loans 54,896 86,003 123,219 161,417 196,929

Investments 2,193 683 617 726 847

Cash & Bank Balances 7,451 1,688 2,584 2,986 3,545

Loans & Advances - CA 1,874 1,176 754 969 1,182

Other Current Assets - CA 1,311 5,596 6,009 6,461 7,076

Fixed Assets 138 332 532 688 835

Miscellaneous Exp. 0 0 0 0 0

Deferred Tax Asset 1,549 1,306 511 488 381

Total Assets 69,412 96,783 134,226 173,735 210,794


Key ratios (%)


Borrowed Funds 0.0% 47.3% 44.0% 31.7% 19.8%

Advances 20.5% 56.7% 43.3% 31.0% 22.0%

Total Assets 0.1% 39.4% 38.7% 29.4% 21.3%

NII -19.6% 45.0% 28.7% 34.3% 24.6%

Non-Interest Income -8.3% 37.6% -23.5% 6.5% 6.9%

Operating Expenses -11.9% 17.3% 38.0% 27.1% 19.3%

Operating Profits -29.1% 92.0% 14.0% 41.8% 29.8%

Core Operating Profits -31.9% 103.0% 17.7% 43.0% 30.4%

Provisions -38.6% 40.8% -89.7% 551.7% 21.1%

Reported PAT -63.9% 303.3% 177.5% 40.3% 32.6%

Yields / Margins (%)

Interest Spread (%) 4.40% 6.27% 5.91% 5.96% 5.86%

NIM (%) 6.13% 7.54% 6.99% 6.93% 6.87%

Profitability (%)

ROA (%) 0.22% 0.75% 1.49% 1.57% 1.67%

ROE (%) 3.2% 8.0% 13.9% 15.9% 16.7%

Cost to Income (%) 63.4% 51.4% 56.1% 53.4% 51.3%

Assets Quality (%)

Gross NPAs (%) 7.73% 3.09% 0.95% 1.05% 1.14%

LLP (%) 6.37% 5.82% 1.79% 0.83% 0.80%

Capital Adequacy (%)

Tier I (%) 9.54% 10.78% 11.00% 9.75% 10.92%

CAR (%) 14.80% 16.67% 18.08% 15.75% 16.36%


DuPont Analysis (%)


NII / Assets (%) 5.85% 7.08% 6.55% 6.60% 6.59%

Other income / Assets (%) 0.29% 0.34% 0.18% 0.15% 0.13%

Total Income / Assets (%) 6.14% 7.41% 6.74% 6.75% 6.72%

Cost to Assets (%) 3.89% 3.81% 3.78% 3.60% 3.44%

PPP / Assets (%) 2.25% 3.61% 2.96% 3.15% 3.27%

Provisions / Assets (%) 1.80% 2.11% 0.16% 0.76% 0.74%

PBT / Assets (%) 0.45% 1.49% 2.80% 2.38% 2.53%

Tax Rate (%) 50.79% 36.94% 39.75% 34.00% 34.00%

ROA (%) 0.22% 0.75% 1.49% 1.57% 1.67%

Leverage (x) 14.4 10.7 9.3 10.1 10.0

ROE (%) 3.2% 8.0% 13.9% 15.9% 16.7%


Valuations


Shares in issue (mn) 66.5 119.4 132.6 132.6 150.0

EPS (`.) 2.3 5.2 13.0 18.2 21.4

EPS (YoY) (%) -63.9% 124.6% 149.8% 40.3% 17.3%

PE (x) 69.4 30.9 12.4 8.8 7.5

BV (`) 73 90 107 123 148

BV (YoY) (%) 1% 23% 19% 15% 20%

P/BV (x) 2.21 1.79 1.51 1.31 1.09

DPS (`) 1.7 1.8 2.3 2.0 2.1

Div. yield (%) 1.1% 1.1% 1.5% 1.2% 1.3%


CIFC 12 June 2012


JM Financial Institutional Securities Private Limited

Member, BSE Limited and National Stock Exchange of India Limited SEBI Registration Nos.: BSE - INB011296630 & INF011296630, NSE - INB231296634 & INF231296634

Registered Office: 141, Maker Chambers III, Nariman Point, Mumbai - 400 021, India Corporate Office: 51, Maker Chambers III, Nariman Point, Mumbai - 400 021, India

Board: +9122 6630 3030 | Fax: +91 22 6747 1825 | Email: [email protected] | www.jmfinancial.in

Analyst Certification

The research analysts, with respect to each issuer and its securities covered by them in this research report, certify that:

All of the views expressed in this research report accurately reflect his or her or their personal views about all of the issuers and their securities; and

No part of his or her or their compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

Analyst(s) holding in the Stock: (Nil)

Disclosure

This research report has been prepared by JM Financial Institutional Securities Private Limited (JM Financial Institutional Securities) to provide information about the company(ies) and sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies) solely for the purpose of information of the select recipient of this report. This report and/or any part thereof, may not be duplicated in any form and/or reproduced or redistributed without the prior written consent of JM Financial Institutional Securities. This report has been prepared independently of the companies covered herein. JM Financial Institutional Securities and its affiliated companies are a multi-service, integrated investment banking, investment management, brokerage and financing group. JM Financial Institutional Securities and/or its affiliated company(ies) might have provided or may provide services in respect of managing offerings of securities, corporate finance, investment banking, mergers & acquisitions, financing or any other advisory services to the company(ies) covered herein. JM Financial Institutional Securities and/or its affiliated company(ies) might have received or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services. Research analysts and sales persons of JM Financial Institutional Securities may provide important inputs to its affiliated company(ies) associated with it.

While reasonable care has been taken in the preparation of this report, it does not purport to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not intended to be and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time.

JM Financial Institutional Securities and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.

This report is neither an offer nor solicitation of an offer to buy and/or sell any securities mentioned herein and/or not an official confirmation of any transaction.

This report is not directed or intended for distribution to, or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject JM Financial Institutional Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions.

Additional disclosure only for U.S. persons: This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account.

This report is intended for distribution by JM Financial Institutional Securities only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a-6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor.

In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, JM Financial Institutional Securities has entered into an agreement with a U.S. registered broker-dealer, Marco Polo Securities Inc. ("Marco Polo"). Transactions in securities discussed in this research report should be effected through Marco Polo or another U.S. registered broker-dealer.

Documents

Cholamandalam Investment and Finance - Initiating Coverage 12 June 12