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On Tuesday, CLSA analysts upgraded Cholamandalam Investment and Finance (CIFC:IN) stock from Hold to Outperform while maintaining a price target of INR1,450.00. The upgrade reflects a change in the firm's outlook on the company's prospects, as noted by the CLSA analyst Piran Engineer.
Engineer cited several factors influencing the upgrade. Over the past year, Cholamandalam's loan growth has moderated from around 40% to 32% year-over-year, and it is expected to further slow to about 26% by the end of fiscal year 2025. This moderation is attributed to a slowdown in auto demand. However, the company's price-to-earnings (PE) ratio has also adjusted from 25 times to 20 times during the same period, indicating a correction in its valuation.
The analyst's report also includes insights from CLSA's auto analyst, who anticipates a resurgence in auto demand in fiscal year 2026 across all segments except heavy commercial vehicles (HCVs), which now represent a mere 7% of Cholamandalam's loan book. This expected pickup in auto sales could have positive implications for the company's performance.
Despite a rise in credit costs of 20 to 30 basis points from the lows experienced in the first half of fiscal year 2024, Cholamandalam has managed to maintain steady net interest margins (NIM). The analyst does not expect any significant worsening in vehicle finance credit costs, especially considering the third-quarter fiscal year 2025 results of peers like AU Small Finance Bank and Shriram.
The report concludes with the observation that Cholamandalam's stock has fallen approximately 30% from its recent peak. Given this price correction and the aforementioned factors, CLSA sees the current risk-reward balance as favorable for the company, leading to the decision to upgrade the stock rating to Outperform while reiterating the price target of INR1,450.00.
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