homemarket NewsCholamandalam Investment and Finance drops over 3% as Nomura initiates coverage with 11% downside
Cholamandalam Investment and Finance drops over 3% as Nomura initiates coverage with 11% downside
Nomura expects the growth rate of Cholamandalam's Assets Under Management (AUM) to moderate, with a Compound Annual Growth Rate (CAGR) of 24% for the period financial year 2024-26, compared to 37% in the previous period of FY22-24,
Cholamandalam Investment and Finance Ltd shares dropped more than 3% in morning trade on Tuesday after global brokerage Nomura initiated coverage on the stock with a ‘Reduce’ rating due to several factors such as valuation concerns, moderating growth, increasing cost of funds and lower profitability expectations.
The global brokerage house has set a target price of ₹1,000 per share, which implies a potential downside of nearly 12% from Monday's closing levels.
In its report, Nomura said that the Non-Banking Financial Company (NBFC) stock is price for perfection, which means that the stock's current valuation reflects very high expectations from investors, leaving little room for any disappointments or negative surprises in the company's performance.
Overall, the financial firm has shown robust performance over the last decade, with further improvement during and after the COVID-19 pandemic, leading to a premium.
However, the current valuation of 4.5 times the one-year forward price-to-book value (P/BV) ratio is approximately 40% higher than its 10-year average, indicating that the stock is trading at a premium relative to its historical valuation.
Nomura expects the growth rate of Cholamandalam Investment’s Assets Under Management (AUM) to moderate, with a Compound Annual Growth Rate (CAGR) of 24% for the period Financial year 2024-26 compared to 37% in the previous period of FY 22-24.
The cost of funds is expected to increase and remain elevated in the near term, which could impact the company's profitability.
The brokerage house does not anticipate much positive impact on Cholamandalam Investment’s Net Interest Margins (NIMs) from potential policy rate cuts.
The credit cost, representing the cost of potential loan defaults, is expected to rise to around 130 basis points (bps) in FY25/26 compared to approximately 120 bps over the previous period FY15-24.
The brokerage expects the Return on Assets (ROA) and Return on Equity (ROE) of Cholamandalam Investment and Finance to be lower in the future, with estimated figures of 2.3% and 19% respectively during FY25-26 compared to 2.6% and 20% in the previous period FY22-24. This suggests a slight decline in the company's profitability and efficiency ratios.
Shares of Cholamandalam Investment and Finance Ltd were trading 2.25% lower at ₹1,106.95 apiece on BSE at 10:16 AM.
First Published: Feb 20, 2024 11:05 AM IST
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