Rationale

The ratings factors in Cholamandalam Investment and Finance Company Limited’s (CIFCL) demonstrated track record of operations across business cycles. CIFCL has steadily scaled up and diversified its portfolio mix while keeping its credit costs under control. The vehicle finance segment shall remain the dominant asset class going forward, even as the share of the other key secured segments (home loans [HL] and home equity [HE]) is set to expand. The share of the new businesses, i.e. Consumer & Small Enterprise Loan (CSEL), SME Finance (SME) and Secured Business & Personal Loans (SBPL), has increased recently, but is not expected to exceed 15% of the assets under management (AUM) over the near-to-medium term. Also, total unsecured loans are expected to be capped at 8-10% of the AUM, going forward. Improvement was seen in the asset quality over the last two years, following the disruptions faced on account of the Covid-19 pandemic. The gross stage 3 (GS3) declined to 2.5% as of March 2024 from 3.0% as of March 2023 (peak of 6.8% in June 2021). CIFCL’s consolidated profitability indicators are comfortable, with the return on managed assets (RoMA) at 2.5% in FY2024 and the return on equity (RoE) at 20.1%, while the liquidity profile remained strong. CIFCL’s had a core Tier-I of 13.9% (Tier-I of 15.1%) and a managed gearing of 6.9x as of March 2024, moderating from December 2023 due to a robust portfolio growth, core Tier-I of 14.2% (Tier-I of 15.6%) and a managed gearing of 6.7x as of December 2023. ICRA notes that CIFCL had raised equity capital of Rs. 2,000.0 crore via a qualified institutional placement (QIP) and another Rs. 2,000.0 crore in the form of compulsorily convertible debentures (CCDs) in October 2023 (compulsorily convertible in October 2026 with a call option available with the investors from October 2025), which has supported the capitalisation profile in recent quarters. Going forward, maintaining adequate capital buffers, on a steady-state basis, would be critical from a credit perspective and shall remain a key monitorable. The positive outlook on the long term rating reflects ICRA’s belief that CIFCL would continue to strengthen its market presence and competitive position, while maintaining comfortable profitability metrics and good asset quality performance. Maintaining adequate capital buffers, on a steady-state basis, would be critical from a credit perspective and shall remain a key monitorable. ICRA has also reaffirmed and withdrawn the long-term rating on the Rs. 70.00-crore subordinated debentures in accordance with its policy on the withdrawal of credit ratings as the instruments have matured and have been fully repaid. The one notch lower rating assigned to the company’s perpetual debt programme compared to the [ICRA]AA+ rating for the other long-term debt programmes reflects the specific features of these instruments wherein the debt servicing is additionally linked to meeting the regulatory norms on capitalisation and reported profitability. The domestic regulatory norms for hybrid debt capital instruments include regulatory approvals from the Reserve Bank of India (RBI) for debt servicing (including principal repayments) if the company reports a loss and is not liable to service the debt if it breaches the minimum regulatory capitalisation norms.