CHOLAHLDNGNSEQ1 FY2023August 18, 2022

Cholamandalam Financial Holdings Limited

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5analyst exchanges

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Management on call

Pritesh Bumb

DAM CAPITAL ADVISORS LIMITED

N. Ganesh

MANAGER & CHIEF FINANCIAL FINANCIAL

V. Director

CHOLA MS

S. Venugopalan

CHIEF FINANCIAL

Key numbers — 40 extracted

10%

bsidiaries and Chola MS Risk as JV. The total income for the quarter ended June 2022 increased by 10% to Rs.3963 Crores while profit after tax increased by 63% to Rs.582 Crores, primarily due to re

Rs.3963 Crore

s and Chola MS Risk as JV. The total income for the quarter ended June 2022 increased by 10% to Rs.3963 Crores while profit after tax increased by 63% to Rs.582 Crores, primarily due to reduction in impairme

63%

he quarter ended June 2022 increased by 10% to Rs.3963 Crores while profit after tax increased by 63% to Rs.582 Crores, primarily due to reduction in impairment charges on loans. On a standalone basi

Rs.582 Crore

ter ended June 2022 increased by 10% to Rs.3963 Crores while profit after tax increased by 63% to Rs.582 Crores, primarily due to reduction in impairment charges on loans. On a standalone basis, total income

Rs.2.10 Crore

pairment charges on loans. On a standalone basis, total income for the quarter ended June 2022 is Rs.2.10 Crores as against Rs.2.12 Crores in the corresponding quarter of the prior year. Loss for the quarter e

Rs.2.12 Crore

On a standalone basis, total income for the quarter ended June 2022 is Rs.2.10 Crores as against Rs.2.12 Crores in the corresponding quarter of the prior year. Loss for the quarter ended June 2022 is Rs.0.26

Rs.0.26 Crore

12 Crores in the corresponding quarter of the prior year. Loss for the quarter ended June 2022 is Rs.0.26 Crores as against Rs.0.93 Crores in the corresponding quarter of the previous year. Cholamandalam Inv

Rs.0.93 Crore

ng quarter of the prior year. Loss for the quarter ended June 2022 is Rs.0.26 Crores as against Rs.0.93 Crores in the corresponding quarter of the previous year. Cholamandalam Investment Finance Company is w

22.3%

l. I will move to Cholamandalam MS General Insurance. Q1 FY2023 witnessed an industry growth of 22.3% and the private sector grew by 33%. Chola MS registered a GWP of Rs.1292 Crores in Q1 FY2023 with

33%

General Insurance. Q1 FY2023 witnessed an industry growth of 22.3% and the private sector grew by 33%. Chola MS registered a GWP of Rs.1292 Crores in Q1 FY2023 with an increase of 43.3% over the prio

Rs.1292 Crore

ed an industry growth of 22.3% and the private sector grew by 33%. Chola MS registered a GWP of Rs.1292 Crores in Q1 FY2023 with an increase of 43.3% over the prior year driven by growth across products, cha

43.3%

sector grew by 33%. Chola MS registered a GWP of Rs.1292 Crores in Q1 FY2023 with an increase of 43.3% over the prior year driven by growth across products, channels, and partners. The previous year

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Guidance — 20 items

Devansh Nigotia

“So, I am not able to really understand that why there is such a big difference and even for us, if it is based on historical number required is just 10% of operating expenses and if I elevate it, then what is the ROE target that we have going forward, if we have to actually increase the operating expense by 10% as a percentage of NWP that increases the combined issue structurally by 10%, so if you can just share a perspective here.”

V. Suryanarayanan

“But we do not expect that growth rate to sustain at 40% or 43% as we go along.”

Devansh Nigotia

“Can you share the target for the combined ratio for next one to two years growth and ROE profile for the next one to two years?”

Devansh Nigotia

“But, if you look at, let us say in the investment leverage currently it is around 6.5 times, which I think the solvency has decreased and if you are looking at 12% to 13% ROE, then to play the recovery of auto-cycle over the next two to three years, the investment leverage will keep expanding, because I think our ROE will be lower than the expected growth.”

V. Suryanarayanan

“What this would mean is that the speed with which the claims get reported is poised to rise and in the revised procedure, the speed of settlement will also happen, so that is one development, which is both positive, because the uncertainty of motor TP loss ratios for the future is poised to reduce; one, and the other impact that it would have is that the cash flow, how the cash outflow will be faster as we proceed to settle those claims faster, so this is the effect on the leverage.”

V. Suryanarayanan

“On the property side where even as you can see in Q1, we have grown much faster and the trend is poised to continue, as also in our traditional businesses of personal accident, which has come back strongly and retail health, both in the attachment side as well as in the retail side, so the growth in these will be at a faster clip and which will keep reducing the proportion of motor business.”

Devansh Nigotia

“Now, when we look at all this increase is only because of the absorption in fixed cost, which is happening upfront or we have also structured and we increased some kind of ad sense, that is a target to some segments of the business because what I see these have largely increased on motor insurance only, so as a percent of net return premium it was I think around 17% so that has increased to 21% to 22%.”

Suryanarayanan

“Q1 is the leaner season for motor and that will be much larger as we go along in the rest of the nine months that would play out in terms of reducing the percentage, so I would tend to think that the 10.6 could come down to about 8.5 or so when we reach the end of the year position, but our intent would be to grow each our business.”

Sanketh Godha

“Got it, Sir, but since you have touched upon the growth, quarter one growth was 43 I believe the growth to sustain for the full year might be tough, so just wanted to understand what is the growth rate we are looking for the full year compared to 43 what you have reported in Q1 and which segment in Q1 all products have fired very well whether there will be anything from queue towards some other products from your perspective?”

V Suryanarayanan

“I would tend to think that by end of the year, we would be at about 1.5 to 1.6X of GI growth, I think that is the kind of growth that we expect and as I said earlier, our own emphasis in property and the other lines will be larger given our conscious bid to diversify and de-risk from motor.”

Risks & concerns — 6 flagged

As you know that it is a consolidation of Chola Finance and Chola Insurance at the Chola Financial Holding level and to start with, I think the consolidated results consist of Cholamandalam Investment and Finance Company and Chola MS General Insurance as subsidiaries and Chola MS Risk as JV.

— Pritesh Bumb

I would tend to think that by end of the year, we would be at about 1.5 to 1.6X of GI growth, I think that is the kind of growth that we expect and as I said earlier, our own emphasis in property and the other lines will be larger given our conscious bid to diversify and de-risk from motor.

— V Suryanarayanan

Very clearly the pressure both on discounting of premium as well as rise in cost of claims is there.

— V Suryanarayanan

Our average duration is around 3.6 years which reduces our interest rate risk and also increases the opportunity for investment in higher yield when the same get matured.

— S Venugopalan

One advantage of lower duration is that it reduces the interest rate risk substantially and provide opportunity for higher yield when get matured like a situation like this.

— S Venugopalan

Opex will change as we take our foot off the OEM business and move towards more of financial business, so as volumes from financial tie-ups go up, then the pressure will reduce and also more importantly in terms of cars and two wheelers would have a larger pressure in terms of opex, CVs would have a lower pressure.

— Suryanarayanan

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Q&A — 5 exchanges

Thanks for the opportunity. Sir, I just have a couple of questions. One is, again, when we look at our operating expenses as a percentage of net return premium, it continues to stay elevated, the run rate was around 41% of net return premium and when we compare it against Lombard that is around 32% to 33% against Alliance that is 28% and against Royal Sundaram that is 25%. So, I am just trying to understand even for us, two years before we used to do around 32% to 33% of net return premium as the operating expenses. So, this sharp jump even in Q1 when our prepaid expenses have been absorbed, t

Suryanarayanan V

First, let me explain in relation to the past, since you mentioned about our own past ratios, our past ratios of yesteryears were when we absorbed the cost spread over the period of the policies. As you are aware, last year IRDA directed us to absorb the costs upfront and we are following the revised method effective April 2022. So, our own numbers of the past that you are mentioning are not comparable to our rates of last year or the rates of this year. Secondly, as I have mentioned even in the earlier calls, strict comparison with the industry players may not be appropriate considering that

Thank you for the opportunity. Sir, if you can quantify out of the total GWP or NWP you have in the current quarter, how much would be in long-term benefit base health or dwelling business as a percentage of the total business, and how much different it is compared to last year and how it could potentially play out for full year of FY2023?

S Venugopalan

Sanketh, as you know the long-term policies, which are embedded into GWP is growing very fast for us. For example, in Q1 2022, the embedded GWP share was at 5% level and it has grown to 10.6% by Q1 2023. This clearly shows that the long-term premiums embedded in the form of dwellings and health is growing for us, that growth will have an impact on the cost as you know that these all absorbed upfront in the P&L. But this pent up as a percentage could be seasonal and it has got up in the quarter one and this is expected for the full year this number to be around 10% or if it come back to 7% to 8

Sir, just wanted to check on investment yield, we are still at about 6.2 and it is broadly unchanged from last quarter so do we see we investment book itself the yield picking up from here on and does the profitability start improving without increasing the leverage that was the first question?

S Venugopalan

Actually, the yield started increasing after RBI increased the repo rate recently, as you rightly said about that, there are two things that is happening, the incremental investments is also operationally growing, which started accruing to the investments and the same is getting deployed at the higher yield for Chola MS. We have been talking about 380 Crores of attrition in the Q1, which is the normalized one when compared to the previous year it is much, much higher. Our average duration is around 3.6 years which reduces our interest rate risk and also increases the opportunity for investment

So, just a few questions from my side, first is on your retail health business if you can quantify how much proportion of the business comes from renewal side especially on the indemnity part of the business, the second is this is not on a quarter perspective but from a long term or historical perspective how do you see the claims really change on the indemnity side as the book vintage increase we see across customers or across geography. My third question in on the wholesale businesses the B2B business excluding group health, so what are the key USP that you have in this business to dominate

V Suryanarayanan

The point is health indemnity will always be susceptible to medical inflation which can grow anywhere between 10% to 14%. Depending on geography, metros obviously will have a much higher inflationary tendency as against the tier two markets, therefore there will be the necessity to do periodic price correction for retail health indemnity. While this is so on one side, the other side is continuous addition of new customers to the portfolio is also essential because when the renewals get extend to the seventh or eighth cohort, it is more a matter of time that the claims emerge from such policies

Thanks a lot for the followup. Sir, can you tell me expected yield for the next one year and for the year after that once our revenue matures so expected investment yield for FY2023 and FY2024?

V Suryanarayanan

See, that would clearly be a function of while the investment corpus accretion that we will have, normal scenario we expect to have net accretion of about 2000 Crores very clearly so to put a number say March 2023 we could well see the corpus ending at about 14500 Crores and the incremental yield that will naturally be market linked, market related. We can also safely assume that we are under weighted in terms of equity, and we could very well see the growth in the equity book to about 4% to 5% of the corpus over the next two years. Thereafter I would leave you to do the math. So, let us say i

Speaking time

Devansh Nigotia

S Venugopalan

V Suryanarayanan

Sanketh Godha

Moderator

Pritesh Bumb

V. Suryanarayanan

Dipanjan Ghosh

Suryanarayanan

S Venugopalan

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Opening remarks

Pritesh Bumb

Thank you, Roshan. Good afternoon, everyone. We on behalf of DAM Capital would like to welcome the management of Cholamandalam Financial Holdings Limited. Today, we have with us, Mr. Sridharan Rangarajan, Director and Mr. N. Ganesh, Manager and CFO of Cholamandalam Financial Holdings, along with Mr. V. Suryanarayanan, MD and Mr. S. Venugopalan, CFO of Chola MS. Now without further ado, we will hand over the call to Mr. Sridharan for his opening remarks. Thank you and over to you, Sir! Sridharan Rangarajan: Thank you. Good morning to all of you and hopefully everyone is safe, your family is fine and kindly take care. So, just a few initial remarks. As you know that it is a consolidation of Chola Finance and Chola Insurance at the Chola Financial Holding level and to start with, I think the consolidated results consist of Cholamandalam Investment and Finance Company and Chola MS General Insurance as subsidiaries and Chola MS Risk as JV. The total income for the quarter ended June 2022 in

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