Cholamandalam Investment - Tricks for investment

BSE Index Analysis, Securties , Standard Experts

Cholamandalam Investment: Q4 demonstrates high growth potential  Key highlights: NPA provisions at Rs 31 mn declined 90% QoQ due to reversal of earlier provisions for business finance segment. Disbursement grew 75% YoY along with improvement in asset quality in Q4FY12. FY12 NIM was down 80 bps YoY to 7.2% but management is confident of maintaining margin at current levels. PAT at Rs 539 mn (our est. Rs 444 mn) was up 300% YoY, backed by strong NII growth (up 41% YoY) and decline in provision expenses (down 95% YoY). Asset quality improved with gross NPA ratio declining 82 bps QoQ to 0.8%.

Takeaways from conference call:

(1) Extraordinary items of Rs 115 mn relate to impairment losses on subsidiaries Chola Factoring & Chola Securities,

(2) To wait for Securitization guidelines before planning any further capital raising,

(3) Rs 15 bn of outstanding borrowings under PSL borrowed prior to FY12,

(4) Aims to reduce cost-income ratio,

(5) No signs of increase in delinquencies although current credit costs are not sustainable in the longer run.

Valuation and Outlook

Q4FY12 numbers demonstrate the true potential of CIFC, post the run-down of personal loan book. We believe fresh capital infusion will significantly enhance lending capabilities and improve profitability. Our TP of Rs 201 (1.4x FY14E ABV of Rs 143) implies 12% upside from CMP of Rs 179.

 

Gujarat Gas: Margin Recovery Sustainable

  Gujarat Gas (GGAS) showed impressive recovery in its profitability after the dismal Q4CY11 as price-hikes taken in Jan Ⱳ led to higher EBITDA margin of Rs 2.5/scm (vs. Rs 1/scm in Q4CY11). Gas volume declined marginally (down 3% QoQ) amid seasonality and loss of few price sensitive customers.

Volumes could surprise positively in next two quarters

Q1CY12 volume was impacted due to seasonality and loss of few price sensitive consumers. However, addition of new consumers (~8k additional CNG vehicles) along with seasonal recovery in demand would support volumes. We expect CY12 and CY13 volumes of 3.85 mmscmd each; and 4 mmscmd by CY15.


Outlook

Going forward we expect profitability to improve led by (a) seasonal recovery in volume, and (b) declining raw material cost due to INR appreciation and softening LNG prices. GGAS is relatively less vulnerable to policy action compared to IGL due to its lower margin (~35% lower than IGL) and lower gross block. Upgrade to BUY with TP of Rs 370. Clarity on BG stake sale could materially impact stock price.

Adverse regulatory action remains a key risk

Despite our belief that CGD companies marketing margins would not be regulated, the regulatory risk would continue to weigh upon stock price till clarity emerges over regulatory framework.