The shares of Cholamandalam Investment and Finance Ltd. reached an all-time high after Morgan Stanley launched a hedge on the financial services provider with an “overweight” rating.
The base price target of Rs 625 each implies a potential rise of 20% from Friday’s close. Its bullish price target implies a potential rise of 74% from current levels, according to a note from the global investment banking firm.
Morgan Stanley expects Cholamandalam to maintain its current price-to-book ratio of 3.5x, thanks to its strong track record and favorable cyclical winds. “In our bullish case, we assume a new high of 5x the pound price as investors start to see it in the league of quality large-cap retail lenders.”
About 73% of Cholamandalam’s total assets under management are in vehicle finance, while 21% in small business finance. The housing finance business, which represents 6% of the company’s overall assets, is in a hyper-growth phase, according to Morgan Stanley. Cholamandalam’s positioning, Morgan Stanley said, has strengthened structurally over the past two years. “Cyclically, its business sectors should experience strong favorable winds over several years. With a strong position in terms of capital, coverage and guarantees, Morgan Stanley expects the company’s assets under management to grow at an annualized rate of 20% and EPS to more than 35% over the years. exercises 21-23.
Morgan Stanley also expects the company to end fiscal 21 with a return on equity of 18%, the highest in its hedge universe. “He built a high RoE business with a fully secured loan portfolio, a rare combination,” the note said. “We expect Chola to keep the expansion in PPoP (pre-provision of operating profit) margin that it achieved in fiscal 21, largely aided by cost control,” a- he declared. “The expansion of credit costs is expected to stimulate the expansion of RoE. We expect a strong RoE of 21% on average in fiscal years 22-23. “
The research firm also cited the example of Bajaj Finance Ltd. strongly revaluing from a market capitalization and valuations identical to those of Cholamandalam currently.
Morgan Stanley pointed to a sharp rise in Covid-19 cases and a disorderly rise in interest rates as some of the main risks for its estimates.
Shares of Cholamandalam Investment rose 3.9% at the start of trading on Monday to a record high of Rs 538.9 each. Of the 32 analysts who follow the company, 27 recommend a “buy,” four suggest a “hold” and a “sell” rate, according to Bloomberg data. The stock is trading 3.6% above its 12-month consensus price target of Rs 500.8 each.