The Hindu Business Line : Cholamandalam Investment: Accept

SHAREHOLDERS in Cholamandalam Investment & Finance (Cholamandalam) can consider tendering their shares in the open offer made by DBS Bank of Singapore.

At Rs 150, the offer price is attractive (the stock is trading below this price), considering the earnings performance of Cholamandalam over the years and the relative valuation of other financial services players.

Shareholders intending to maintain their stake can tender in the offer and buy in the market.

In any case, not all the tendered shares offer would be acquired since the non-promoter holding is a high 45 per cent, and DBS is seeking to acquire only 20 per cent. Shareholders tendering the entire lot may still end up holding a proportion of their holdings.

Cholamandalam is one of the few deposit-taking non-banking finance companies. It is a diversified financial services player in the business of truck financing; its subsidiaries are into stock broking, asset management, financial products distribution and insurance.

Cholamandalam reported revenues of Rs 230.9 crore and earnings of Rs 30.8 crore in FY-05.

At Rs 150, the stock is richly valued in relative terms, trading at nearly 17 times its FY-05 earnings. Considering the poor return on net worth of less than 15 per cent over the years, the price-to-book value is also relatively high at 1.9.

There is, thus, a strong likelihood of a decline in valuation in the interim, which could be used to accumulate the stock.

Is there a case to hold on to the stock? Yes. The entry of DBS as a major stakeholder could see Cholamandalam get converted to a bank.

The markets have a fancy for private sector banks run by professionals and the valuation for the stock could improve consequently.

That, however, could take a while to materialise and shareholders should book profits now and re-enter later.

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