BQ Prime's special research section collates quality and in-depth equity and economy research reports from across India's top brokerages, asset managers and research agencies. These reports offer BQ Prime's subscribers an opportunity to expand their understanding of companies, sectors and the economy.
Motilal Oswal Report
Investment Rationale
We expect vehicle financiers to use the levers of operating and credit costs and deliver a healthy return on asset, despite the compression (or plateauing) in net interest margin. We model an assets under management compound annual growth rate of 23%/20%/14% and a profit after tax CAGR of 32%/20%/15% for Cholamandalam Investment and Finance Company Ltd. / Mahindra and Mahindra Financial Services Ltd. / Shriram Finance Ltd. over FY23-25.
This will translate into a return on asset/return on equity of 2.8%/22.6% for Cholamandalam, 2.2%/13.4% for Mahindra Finance and 3.1%/15% for Shriram Finance in FY24E.
Our estimates for FY24/FY25 are largely unchanged for Shriram Finance and Mahindra Finance while we raise our FY24E/25E earnings per share by ~2.5%/10% for Cholamandalam to factor in margin expansion and new product segments becoming further RoA accretive within 12-15 months.
We reiterate our preference for Mahindra Finance, followed by Cholamandalam and Shriram Finance. Cholamandalam benefits from a well-diversified loan book, with newer business lines shaping up well. It has more levers than its peers to deliver a healthier RoA/RoE.
We reiterate our 'Buy' rating on all the three vehicle financiers viz. Cholamandalam Finance with a target price of Rs 1,350 (premised on 5.0 times FY25E book value per share), Shriram Fianance with a target price of Rs 2,100 (premised on 1.4 times FY25E BVPS) and Mahindra Finance with a target price of Rs 400 (based on 2.5 times FY25E BVPS).
Key Risks:
In the near-term, the monsoons (because of the EL-Nino impact) can play a spoilsport on the asset quality and
slowdown in the industry vehicle demand in the medium-term.
Favored play in a stable-to-declining interest rate environment
Vehicle financiers typically bear the brunt of a rising interest rate environment in the form of margin compression because of the fixed rate nature of a vehicle finance product. However, in a stable-to-declining interest rate regime, vehicle financiers will be better placed in terms of margin than other product segments.
They are well-positioned to ride the strong underlying demand for vehicles, will incrementally start exhibiting plateauing of net interest margin and subsequently witness margin improvement.
Click on the attachment to read the full report:
DISCLAIMER
This report is authored by an external party. BQ Prime does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of BQ Prime.
Users have no license to copy, modify, or distribute the content without permission of the Original Owner.
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
