Cholamandalam Investment Stock Hits A Record High After Morgan Stanley’s Bullish Rating

Shares of Cholamandalam Investment and Finance Ltd. jumped to a record high after Morgan Stanley initiated coverage on the financial services provider with an ‘overweight' rating.

The base case price target of Rs 625 apiece implies a potential upside of 20% from Friday's closing. Its bull-case price target implies a potential upside of 74% from current levels, according to a note by the global investment banking company.

Morgan Stanley expects Cholamandalam to sustain its current forward price-to-book ratio of 3.5x, courtesy of its strong track record and cyclical tailwinds. “In our bull case, we assume a new high of 5x price-to-book as investors start seeing it in the league of quality large-cap retail lenders.”

About 73% of Cholamandalam's total assets under management belong to vehicle finance, while 21% to small business financing. The housing finance business, which is 6% of the company's overall AUM, is in the hyper-growth phase, according to Morgan Stanley. Cholamandalam's positioning, Morgan Stanley said, has strengthened structurally over the last two years. “Cyclically, its business lines are likely to see strong multi-year tailwinds.” With a strong position in terms of capital, coverage and collateral, Morgan Stanley expects the company's AUM to grow at an annualised rate of 20% and EPS at more than 35% over FY21-23.

Morgan Stanley also expects the company to end FY21 with a return on equity of 18%—the highest for its coverage universe. “It has built a high RoE business, with a fully secured loan book, a rare combination,” the note said. “We expect Chola to retain the PPoP (pre-provisioning operating profit) margin expansion it achieved in FY21, helped largely by cost control,” it said. “Credit cost expansion should drive RoE expansion. We forecast a strong 21% RoE on average in FY22-23.”

The research firm also cited the instance of Bajaj Finance Ltd. rerating sharply from a point of identical market capitalisation and valuations as Cholamandalam is currently.

Morgan Stanley highlighted a sharp surge in Covid-19 cases and a disorderly rise in interest rates as some of the key risks to its estimates.

Shares of Cholamandalam Investment rose as much as 3.9% in early trade on Monday to a record high of Rs 538.9 apiece. Of the 32 analysts tracking the company, 27 recommend a ‘buy', four suggest a ‘hold' and one rates ‘sell', according to Bloomberg data. The stock is trading 3.6% higher than its 12-month consensus price target of Rs 500.8 apiece.