Cholamandalam Investment and Finance

Company Limited
Instrument
Perpetual Debt Programme

Amount (Rs. crore)

50.00

Rating Action
[ICRA]AA- (Stable) assigned

ICRA has assigned [ICRA]AA- (pronounced ICRA double A minus) rating to the Rs. 50 crore *
perpetual bonds programme of Cholamandalam Investment and Finance Company Limited (CIFCL or
the Company). Earlier in June 2013, ICRA reaffirmed the [ICRA]AA rating with a stable outlook to
CIFCLs non-convertible debentures, subordinated debt and bank facilities, [ICRA]AA- rating with a
stable outlook to other perpetual bonds and [ICRA]A1+ rating to the Commercial Paper / Short term
debt programme and short term bank facilities.
CIFCLs ratings are based on the ability of the company to scale up profitably, companys track record
in the vehicle finance segment, the demonstrated financial and management support from Murugappa
Group and an experienced management team. Over the medium term, continued access to
Murugappa Groups expertise, customer relationships and operational support is likely to support the
company in its expansion plans. In the quarter ended June 2013, CIFCLs vehicle finance asset quality
deteriorated as delinquencies in the 90+dpd bucket increased to 2.7% from 1.5% in March 2013 and
1.1% in June 2012, while the deterioration in 30 day+ delinquencies has been sharper. The pressure
on borrowers cash flows is likely to persist in the near term as the demand outlook remains weak and
an increase in fuel prices appears imminent, which would keep delinquency levels high. It would be
very important for CIFCL to arrest the flow of softer delinquencies into harder buckets. Nonetheless,
despite the deterioration ICRA takes comfort from the granularity of CIFCLs portfolio, adequate
lending norms, good systems, strong collection and recovery mechanisms to ensure control over credit
losses and ability to recapitalise at regular intervals to support growth and solvency. Further, the riskadjusted return in the core vehicle financing segment is likely to remain strong.
CIFCLs Tier I capital (including perpetual debt instruments) in relation to managed assets improved
marginally to 10.39% as on June 30, 2013 from 10.23% as on March 31, 2013, despite a 6% quarterly
growth in managed portfolio as a result of strong internal capital generation. Equity-like features of
perpetual debt instruments benefit economic capitalisation as it provides some loss absorption
capacity to other debt holders. Maintaining prudent economic capitalisation levels would continue to
remain a key rating sensitivity in light of the portfolio expansion plans and the challenging operating
environment. In ICRAs view, CIFCL would continue to remain dependent on periodical external equity
infusion to support growth; ability to raise equity to maintain prudent capitalisation would be important.
ICRA has taken note of the companys venture into tractor, MSME and housing loans. Operational
support available within the group for MSME segment and the relatively low share of these new
segments in the total portfolio in initial years mitigate the risk to an extent. Over the medium term,
CIFCLs primary focus is likely to remain on Commercial Vehicle financing and Home Equity and the
share of the newer segments tractors, housing and MSME are likely to remain low.
Internal capital generation continued to improve in fiscal 2013 as the company managed to maintain
interest margins steady at 6.6% in QE June 2013, unchanged from the previous quarter. Firming of
systemic short term rates is likely to have a moderate adverse impact on CIFCLs incremental
borrowing costs and interest margins could shrink marginally from current levels. Improvement in
operating efficiency as the operating cost-operating income ratio improved to 38% in QE June 2013
from 41.6% in fiscal 2013 is likely to offset the impact of pressure on margins. While credit costs, which
remained stable at 1.2% of average assets in QE March 2013 and QE June 2013 could increase on
account of the asset quality pressure. As a result, the return on average assets, which stood at 1.9% in
QE June 2013 and return on average equity which stood at 18%, is likely to come under some
pressure.
* 100 lakh = 1 crore = 10 million
Capital adequacy calculated on Risk weighted assets including securitized & assigned portfolio, adjusted
for cash collaterals provided on the securitized & assigned portfolio

CIFCLs funding profile continues to remain comfortable as the company continues to maintain strong
relationships with institutional lenders. With nearly 50% of CIFCLs borrowings from banks and more
than 80% long term borrowings, CIFCLs funding costs are relatively shielded against the sharp
increase in short term interest rates; however, incremental borrowings are costlier by around 50-75
bps. Overall cost of funds, which dropped to 9.6% in QE June 2013 from 9.8% in QE March 2013 is
expected to be higher in the current fiscal compared to fiscal 2013 by 20-30 bps. The liquidity profile of
the company is comfortable with access to a diversified set of institutional lenders which helps the
company bridge its ALM gaps. However, with a growing share of long duration home equity and
housing loans in the total portfolio, the company could face some asset-liability mismatches in the
medium term buckets; although access to medium term bank funding, Tier II and Tier I capital
instruments could help plug these mismatches.
Company Profile
CIFCL is a non-banking finance company (NBFC) and part of the Chennai-based Murugappa group of
companies. Incorporated in 1978, CIFCL has a strong presence in across India and subsequently
widened its geographical presence to Northern and Western India. The core business segments of the
company include vehicle finance and home equity loans. The company has also recently ventured into
tractor financing, SME finance, gold loans and home loans. The company also offers stock broking and
distribution of financial products to its customers through its subsidiaries Cholamandalam Securities
Ltd and Cholamandalam Distribution Services Ltd. The Company operates from 526 branches across
India with total assets under management of Rs. 22,261 crore as on June 30, 2013 compared to Rs.
15,843 crore as on June 30, 2012.
August 2013
For further details please contact:
Analyst Contacts:
Ms. Vibha Batra (Tel. No. +91-124-4545302)
vibha@icraindia.com
Relationship Contacts:
Mr. Jayanta Chatterjee (Tel. No. +91-80-43326401/ 098 450 22459)
jayantac@icraindia.com

Copyright, 2013, ICRA Limited. All Rights Reserved.

Contents may be used freely with due acknowledgement to ICRA
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