Cholamandalam Investment and Finance : Call Transcript – Q1-FY-2022 – Aug 12, 2021

"Cholamandalam Investment and Finance Company

Limited Q1 FY2022 Earnings Call"

August 02, 2021

ANALYST: MR. NISCHINT CHAWATHE - KOTAK SECURITIES LIMITED

MANAGEMENT: MR. VELLAYAN SUBBIAH - CHAIRMAN & NON-

EXECUTIVE DIRECTOR - CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITED

MR. RAVINDRA KUNDU - EXECUTIVE DIRECTOR - CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITED

MR. SHAJI VARGHESE - PRESIDENT - HOUSING FINANCE - CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITED

MR. SURESH KUMAR S - SENIOR VICE PRESIDENT & BUSINESS HEAD - LAP & SME - CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITED

MR. ARUL SELVAN - EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER - CHOLAMANDALAM INVESTMENT AND FINANCE COMPANY LIMITED

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Cholamandalam Investment and Finance Company Limited

August 02, 2021

Moderator:Ladies and gentlemen, good day and welcome to the Cholamandalam Investment and Finance Company Limited Q1 FY2022 earnings conference call hosted by Kotak Securities Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call please signal an operator by pressing "*" then "0" on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nischint Chawathe from Kotak Securities Limited. Thank you and over to you sir!

Nischint Chawathe: Good morning everyone. Welcome to the Earnings Conference Call of Cholamandalam Investment and Finance Company Limited to discuss the 1Q FY2022 performance of Chola and share industry and business updates. We have with us today Mr. Vellayan Subbiah - Chairman and Non-Executive Director; Mr. Ravindra Kundu - Executive Director; Mr. Shaji Varghese - President, Housing Finance; Mr. Suresh Kumar S. - Senior Vice President

• Business Head - LAP & SME and Mr. Arul Selvan - Executive Vice President and CFO. I would now like to hand over the call to Vellayan for his opening comments.

Vellayan:Thank you Nischint. Good morning everybody. We just go through quickly the key financial results for the company for the quarter. Disbursements were at Rs.3635 Crores which is marginally higher than Q1 FY2021 though the AUM was at Rs.75,763 NIM was at Rs.1363 Crores has up 39% for Q1 FY2022 and pre-provision operating profit was at Rs.993 Crores which is a growth of 56%. Our PAT was at Rs.327 Crores in Q1 FY2022 as against Rs.431 Crores in Q1 FY2021. Broadly because of the second wave of the COVID pandemic between localized lockdowns and other factors starting mid April 2021, which had extended in most states up to mid June and in some states still partial lockdowns in force, so basically many of the borrowers and staff of CIFCL were impacted by the pandemic in the second wave and we as a company basically shifted our priority from business to protecting the wellbeing of affected persons, in a lot of rural areas there was a lot of challenge in terms of health infrastructure so getting everything there became a priority for the company including the teams spending a lot of efforts looking at everything from oxygen to drugs kind of getting anything that they could do to support both our employees and kind of keep you available during this whole effort. So this basically results in a setback in performance in Q1 on both disbursements and collections, disbursements were up 1% compared to Q1 FY2021, the collections suffered and resulting in an increase in Stage 3 assets from 3.96% to 6.79%. The restructuring option with asset classification benefit extended by RBI under "Restructuring 2.0" was used to the extent to 3.86% of the book as of June 2021. So total restructuring stood at 5.44% of the book and these loans have been classified as Stage 2 assets by us currently.

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CIFCL held management overlay provisions of Rs.750 Crores as on December 2020 and then we created an additional overlay in March to the tune of Rs.350 Crores, so a total of Rs.1100 Crores, of this basically we have reversed Rs.400 Crores during the quarter and this release was made towards additional provisions which were in Stage 1 in March 2021 and where the customer continued to be in Stage 1 in June 2021 without downgrade to a subsequent stage and additional provisions held in March 2021 which were in Stage 1 and Stage 2 in March 2021 and moved into Stage 3 in June 2021 on which higher provisions as per regular Stage 3 norms had been created. Post this reversal we still have a management overlay of Rs.700 Crores in Stage 2 and 3 to manage any future contingencies. We have also witnessed recovery in disbursements and collections during the latter part of June and in July post relaxation of state wise lockdowns and we expect a gradual revival in subsequent quarters in FY2022 with normalization and rollbacks of accounts, which moved to higher buckets.

In terms of individual businesses, vehicle finance disbursed Rs.2846 in the quarter as against Rs.3231 which is a decline of 12%, LAP disbursed Rs.386 as against Rs.119 which is a good growth because of the challenges during first lockdown, HL disbursed Rs.199 as against Rs.190 a growth of 5% and AUM was at Rs.75,763 compared to Rs.70,826 and PAT was at Rs.327 like I discussed, PBT-ROA was at 2.5% as against 3.5% the previous year and ROE obviously dropped as a result to 13.5%. We still have strong liquidity position with about almost Rs.8000 Crores as cash balance as at the end of June which includes Rs.1500 Crores which we have invested in GSEC which we show under investments and a total liquidity position of Rs.16,400 Crores which includes undrawn lines. ALM is comfortable we have no negative mismatches. In terms of asset quality I think we just talked about it, Gross Stage 3 stood at 6.79% and other provision coverage of 35.51% as against 3.34% of Stage 3 during June 2020 which had a provision of 41.6%. Total provisions carried against the overall book was at 4.37% as against normal provision levels of 1.75% prior to pandemic and we will obviously talk about the impact of the Supreme Court order in the past and that still remains in force. The capital adequacy of the company was at 19.08% as against regulatory requirement of 15 and Tier-I was at 16.6%. I will stop here and will be happy to take questions.

Moderator:Thank you very much. We will now begin the question and answer session. Ladies and gentlemen we will wait for a moment while the question queue assembles. The first question is from the line of Prashanth Sridhar from SBI Mutual Funds. Please go ahead.

Prashanth Sridhar: Sir just two questions from my side. On the vehicle finance if you could give us some color on how your customer segment would be dealing with issues like capacity utilization, freight rate, increasing diesel prices, etc., and if you could give us some numbers like Stage

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August 02, 2021

2, Stage 3 and restructuring in the LAP, SME and home loan segment? That is it from my side. Thank you so much.

Ravindra Kundu: Vehicle finance last time also I mentioned that we are actually into a slightly new category which is actually 0 to 10 vehicle or 1 to 10 vehicle customer so in that category utilization level or managing the vehicle during this time when diesel prices have gone up is better, but besides fleet operator who are actually having opex a little higher than the SRTU customers they are struggling where the exposure is lower in our case and second is that in the case of heavy commercial vehicle we have presence in few market only not across the country and during last two years we have been reducing our exposure in heavy commercial vehicle after noting that the PT has gone up in 2018-19 and since then we have reduced so we got benefited on PT also at overall level. So the utilization level has been impacted in one segment of the customer, large fleet operator and SRTUs are better off but things are improving this was there in Q1 but in the month of July things have improved significantly. We have seen that industry has sold 10000 units of heavy commercial vehicle so TIV has gone up and if in case this continued there is no COVID impact wave 3 then obviously heavy commercial vehicle is also expecting replacement demand which is due for last few months and we will see that heavy commercial vehicle customers will benefitted in time to come. As far as the Stage 3 and Stage 2, Stage 2 as a restructuring we have done about 2.95% of the portfolio and our Stage 3 stands at about 8.86% for LAP.

Moderator:Thank you. The next question is from the line of Dhaval Gada from DSP Mutual Fund. Please go ahead.

Dhaval Gada:Thanks for the opportunity. I have two questions. First on the stress increase that we see both in Stage 3 as well as higher share of restructured loans, just wanted to understand if you look at the moment given that there was no moratorium this time you would have expected both Stage 3 and restructure to increase, just curious to know is the extent lower than what you initially estimated and by when do you see normalization of this trajectory and related to that is the second question on credit cost so you have excess provisioning of about 700 Crores how much would that be adequate enough with the normalized credit cost for FY2022?

Ravindra Kundu: We will tell you the vehicle finance data and LAP and HL have done also similar way. In the month of April we saw 93% of our billing collection efficiency which went down to 84% and in June it was 101% and July it is 114% so the shred came in the month of April and May then after that it has actually started improving in fact in the month of July Stage 2, Stage 3 has gone down as against the June closing. The overall step is due to in the month of June when entire country was not operational southern part of the country was under lockdown and part of East was also under lockdown like North East, Odisha and

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West Bengal it got impacted. In fact in the month of July also we saw lockdown is partially applicable in Odisha and WB and stringent overall lockdown is there in North East. So in spite of that we have seen our collection efficiency has gone up to the level of March in the month of July and that is an indication that things have started improving in terms of Stage 2, Stage 3. As far as the provision is concerned, provision we have taken 4.37 at overall book and our normal provision used to be 1.75 so at this point in time at overall book level we are three times of provision so it is more than adequate.

Dhaval Gada:Do you expect by second quarter we should start seeing normalization or it would be in the second half of the year given that the collection trends are quite buoyant?

Vellayan Subbiah: Everything cannot be done in this quarter, every month these resolutions are happening so normalization has started happening in the month of June, it will take six to nine months to get into the exactly the similar level. What we are expecting that we will try to deliver better number than last year closing as on March 31, 2021 in this financial year closing.

Dhaval Gada:Perfect Sir, thank you and all the best.

Moderator:Thank you. The next question is from the line of Chetan Gindodia from Alfaccurate Advisors. Please go ahead.

Chetan Gindodia: Sir two things, one is in terms of the competition intensity which banks is also moving aggressively in this stage how do you see that from competition perspective and second considering that the environment still looking very challenging particularly on retail financing side how do you see the trends over the next two, three, four quarters any change in strategy from the long term perspective if you can highlight on that, that will be useful?

Vellayan Subbiah: We have mentioned that in the past that the auto cycle as far as the heavy commercial vehicle is something which is going to picked up going to start anytime and replacement demand is going to start so heavy commercial vehicle we will see better number in time to come and this month itself July if you see the data the heavy commercial vehicle segment has registered very good number other than that entry level car, entry level two-wheeler, tractor, used vehicle all of them is going to do better and we are present over 1100 branches, 80% branches in Tier-II,Tier-III town and these are places where the intensity is there but we are able to do the job because of our people and our relationship with the manufacturer and the customer so we need not change the strategy dramatically but we will definitely come back to some of the product which we have not done so far and overall disbursement in the month of July we have seen that we have delivered more than July 2019 disbursement as an organization put together vehicle finance, LAP and HL. So this trajectory is actually

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