CIFC: Fastest-growing NBFC at scale

15 May 2023 , 10:46 AM

Recommendation: Buy

Target Price: Rs. 1,230

These segments have US$600 billion TAM with <25% penetration, providing secular growth opportunity. Consequently, analysts at IIFL Capital Services are forecasting 32% earnings CAGR for Chola, 2-20% ahead of consensus. While absolute valuations are expensive at 4.7x, they are reasonable on relative basis adjusted for its growth and profitability. 

Expect higher growth and earnings trajectory versus history

Analysts at IIFL Capital Services expect CIFC to deliver 28% AUM CAGR (versus 20% 5Y average) and 32% earnings growth (versus 22% 5-year average) led by foray into new businesses (MSME and PL), and distribution expansion for existing products. With faster loan growth and mix shift in favor of more profitable segments (170 basis points higher ROAs), IIFL estimates are 2-20% ahead of consensus.

Long growth runway for Chola

CIFC’s new businesses (MSME and PL) have US$600 billion TAM with <25% penetration, presenting a secular growth opportunity. Further, distribution expansion (<40-50% penetration into existing branches) should drive robust growth in HL and LAP. Sector level MSME NPAs adjusted for legacy assets are only ~3-4%, contrary to the popular belief of ~12-14%.

Street-high Target Price; valuations reasonable adjusted for profitability and growth

Analysts at IIFL Capital Services expect CIFC to continue consuming capital, and with 14.8% Tier 1, they are building in Rs. 30 billion of capital raise. While absolute valuations are expensive at 4.7x fwd P/B, they appear reasonable adjusted for superior profitability and growth (bottom quartile on PEG basis across banks and NBFCs).