Cholamandalam Investment and Finance -- The promise of returns

Sanjiv Shankaran

THE CHOLAMANDALAM Investment and Finance Company accepts fixed deposits for one, two and three years under two schemes -- cumulative and non-cumulative. The interest rates are 10, 11 and 12 per cent respectively.

Last month, Business Line recommended that investors consider investing in the three-year deposit in view of the attractive rate on offer. For investors who may have, since then, exhausted investment avenues that offer tax benefits, Cholamandalam's two-year deposit scheme too looks attractive considering the risks involved. The two-year deposit scheme offers an interest rate of 11 per cent and the minimum deposit amount is Rs 10,000. Beyond that amount, deposits are accepted in multiples of Rs 1,000.

Business background: Cholamandalam Investment is a non-banking finance company (NBFC) involved in hire-purchase and leasing. The company's core business is financing vehicles, both commercial vehicles and cars. For the year ended June, vehicle finance constituted 52 per cent of the company's assets. This segment is likely to become more dominant in Cholamandalam's business portfolio because disbursements towards vehicle finance increased by a compound rate of about 38 per cent over the last two years.

The risk level has gone up in equipment finance as the borrowers are corporates and they have been impacted by the enhanced competition. Consequently, Cholamandalam reduced its exposure to the sector and disbursements fell sharply over the last two years.

Capital market financing constituted 10 per cent of the company's assets and is the company's fastest-growing business. The growing importance of this business insulates Cholamandalam from downturns in vehicle financing.

Business risks: Top-rung NBFCs have generally contained the risk of bad loans better than other financial intermediaries. Cholamandalam's aggregate non-performing assets (NPAs) was 2.3 per cent on June 30. Taking into account the provisioning, the net NPAs were 1.7 per cent of the total assets.

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In the immediate future, Cholamandalam's problems may stem from the rising fuel prices. A hike in diesel price in conjunction with a downward revision in official economic growth estimates suggest that NBFCs with exposure to commercial vehicle financing may be faced with a few problems.

Financial strength: Cholamandalam's financial statements suggest the company's foundations are strong enough to weather a storm. The company's cash profit margin (after excluding items such as depreciation and provisions) has been around 50 per cent over the last two years.Cholamandalam's sound financial position and track record suggest a longer-term deposit can be contemplated. For investors who have exhausted investment options offering tax benefits for this fiscal (2000-01), Cholamandalam's two- and three-year deposit schemes may be considered.