Cholamandalam Financial Holdings Limited (CHOLAHLDNG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '23 Earnings Conference Call of Cholamandalam Financial Holdings hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanket Chheda from DAM Capital Advisors. Thank you, and over to you.

Thank you. A very good morning to all of you. We have with us the entire management team of Cholamandalam Financial Holdings to discuss their Q3 results. So we are a accompanied by Sridharan Rangarajan, who is the Director; Mr. N. Ganesh, who is the CFO; Mr. Suryanarayanan, who is MD, Chola General Insurance; and we have Venugopalan, who is the CFO, Chola MS General Insurance. So without further delay, I would hand over the call to the management for their opening remarks, followed by a question and answer. So over to you, sir.

Yes. Good morning to all of you. This is Sridhar. I have with me my colleagues, Suryanarayanan, MD; and Mr. Venugopalan, CFO of Chola General Insurance; and Ganesh, our CFO of the company. The consolidated results of the company consists of Cholamandalam Investment and Finance Company Limited, Cholamandalam MS General Insurance Limited as subsidiaries and Chola MS Risk Services Limited as a JV. The total income for the quarter ended December 22 increased by 20% to INR 4,777 crores, while profit after tax increased by 33% to INR 720 crores. Cholamandalam Investment and Finance Company, you might have attended the call and entered details on the presentation and the transcripts are well available. Chola has delivered the best ever disbursal collection and profitability in Q3 FY '23. Chola has gained market share across product segments in vehicle finance and other business units. AUM as of December 31, 2022, stood at about INR 1,03,189 crores. This is a milestone. The company holds strong liquidity position. ROE is at 19.1% and the CAR as of December 31, 2022, was at 17.75%. Cholamandalam MS General Insurance Company registered a gross written premium of INR 1,625 crores in Q3 FY '23, an increase of 23% over the previous year, driven by growth across channels and partners. The company continues to have a dominant presence in motor segment is strategically diversifying across motor ecosystem. In Q3, the industry grew by 18.5%, private sector players by 32.3%. YTD December 2022, industry grew by 16.2% and private sector players grew by 21.6%. For the same period, Chola MS delivered a growth of 27.5%. In Motor, Chola MS improved the market share from 4.9% to 5.3%. And PA grew the market share to 4.9%, and fire business, the growth is at about 37%. YTD December, Motor, representing 69.3 percentages of portfolio grew by 24.5%. Commercial representing 14.3% percentage of the portfolio grew by 37%. Health, accident, travel and personal accident and representing 16.4% of the portfolio grew by 38%. Within Motor, 2-wheeler and passenger car share, 21% and 36%, respectively. Commercial vehicle's at 44%. The company's long-term policies growth was trending, at the right direction, but the company continues to trend, absorb the full cost for all long-term policies. However, the UPR gets earned over the long-term policies, created -- creating an embedded value in the balance sheet. Solvency ratio as of December end is at 2.06 compared to the same period last year, which was at 4.86. Profit after tax for Q3 FY '23 was INR 43 crores against INR 18 crores of last year. YTD back was at INR 115 crores as against INR 16 crores in the same period last year. With these comments, I would like to now open up for our question-and-answer. Thank you once again.

[Operator Instructions] We have a question from the line of Devansh Nigotia from SIMPL.

Just a couple of questions. Sir, one is in case of our motor book, since we have significantly built a 2-wheeler and PV book, and that has come at a very high cost, so where do we see this mix settling in terms of our targeted mix between PV, two-wheeler and commercial vehicles? Any thoughts if you can share?

Presently, the 2-wheeler mix is at about 21%, 22% or so and the passenger cars is at about 35% or so. Over the medium term, with the buoyancy in commercial vehicles emanating, we would expect to see commercial vehicles at roughly at about 50% of the book and balance between 2-wheelers and cars. We've also seen the regulator coming up with a draft exposure on long term relating to tractors. If that were also have to come through, then we could see a growth even in the tractor segment as well. But broadly, 50% commercial vehicles and noncommercial vehicles at 50% is the mix that we see going forward.

Okay. So the mix will remain broadly. So we have achieved the targeted mix that we were looking for, for a long period of time, and we have achieved that now?

I think given our channel presence, which is well diversified across and the financial tie-ups, including the sister company relationship, we would expect the mix to settle around this level.

Okay. And how do you see the competitive intensity in motor insurance, both in [ ORD ] as well as 2-wheeler? And if vehicle-wise, you can share your commentary, how is the intensity right now?

See, the competitor intensity is at its peak across categories. It is not that it is in any way greater or lower in any particular product segment. Quite naturally, the peak competition would be in the cars and 2-wheelers, especially in the new vehicle space in the OEM segment. It would be relatively lower in the commercial vehicle space. And the key is having long-standing relationships with financial partners, so thankfully, for July MS had these partnerships in place, which should help us.

Okay. Okay. Because -- so we find the competitive intensity high in PVA and 2-wheeler and that is the book that we have built in last 1, 2 years, so just a little confused on the targeted combined ratio that you want to achieve? And also how are you thinking in terms of risk reward and pricing in different vehicle segments. So can you just share a thought process?

The competitive intensity with respect to pricing discounts, has meant that the undamaged ULRs have remained at an elevated level for almost all players. You could possibly have heard it in other investor calls as well. But then July MS has been -- by virtue of its mix and granular choice, has being able to keep the motor OD loss ratios fairly. For instance, in Q3, we are at about 68 -- so where we have been able to reduce it from Q2 level and from Q1 as well. So I think this is more or less at the level, maybe another 1% improvement can possibly come through. But then that is where we expect this to -- certainly for the time being, unless the discount situation. So that is what we would want to think as far as the OD loss are concerned. As I've always maintained in the past, the motor third-party loss would also depend on the kind of price increase that the government is considering for the ensuing year from April, it would largely depend on that. That is part to, like, make the overall motor portfolio as such in totality. That is where the COR would rest. But then let us also understand that it is the motor portfolio, which brings in the investment book, which companies use for building the car parts as well as generating the investment into.

Okay. And how do we see the competitive intensity in terms of remunerating the distribution channel? Because we have seen OpEx being elevated in motor across all the players. So is it easing? Or is it still at peak? Or can you share some direction on where is it heading?

There, still competitive intensity is there. And it's a function of choice as to where we want to grow and how much we want to grow. It is always there. We have already seen some larger players tone down growth in the Motor segment. And in fact, even if you look at our growth, our growth is -- in motor is more or less on the same level as that of the industry. So we are just about maintaining our market share, so to speak. If private sector has grown at 20.8%, we are at 24.5%. So that is the level that we have seen our growth. And our reported growth, let's also consider that it takes in the long-term premium, which has turned into premium from previous year. So that element is also there. That addition is also coming in. So coming back to your question on market sourcing costs, the market aggression is there. But then we would have to manage our cost to stay with our choices as to line of business that we want to be in and also the geographies where we want to operate.

[Operator Instructions] We have our next question from the line of Sanketh Godha from Avendus Spark.

Sir, we mentioned just last quarter, we took some corrective measures with respect to health and PA to improve our loss ratio. But if you look at the third quarter number, it still remains a little on the higher side, around 71 percentage, a marginal improvement compared to what we have done in the second quarter. So sir, just wondering whether it comes with a lag or is it because the clean severity seems to be higher or pricing competition led us to this higher loss ratio? That's my first question.

Yes. So on the health at large, we have made some corrections with respect to pricing, both in our retail products as well as the products that we offer to our public sector bank high up. So there is a price correction of about anywhere between 20% to 25%, which has been done. And we do expect that the benefit of such price increase will start reflecting in the ULRs as we go along.

Okay. So it's more to be just reflected in the next year rather than getting reflected in the current year because that's between run off. Then now you'll see the interest rate. Is that the way I should understand, sir.

The larger effect would be seen, but we should start seeing the trend even for Q4 when we get there.

Okay. Got it. And second question is the basic expense of management, because in the new regime of expense of management, which is proposed by the IRDA, it says that you can't breach or the 30% -- or number for multi-line [ credit ] is 30%. And today, we are at 40%. So any, what do you call, path you want to guide us to how you will ultimately achieve 30%, whether we will increase our exposure to wholesale businesses. Currently, we are 84%, 85% in retail in nature, which OpEx intensive. So any thoughts if you can share how we gradually will move in that direction without deteriorating our combined?

Look, there are 2, 3 dimensions to this question. First is that we present method out for competition. That 40% also includes the long-term premium that we are collecting, especially in motor, which is not reflected in the top line. The cost is sitting. So as an industry, we have represented to the regulator that while for evaluating and computing this limit, we should see this in total, so that is one element. The second element is that the company may consider an entry to the crop insurance business, which can help in tuning down and providing the balance for the ensuing years. So that is a thing that the Board has discussed and probably we should have greater clarity as we freeze our business plan sometime later next month. That is the second dimension. The third dimension is that, anyway, the regulator is also giving a glided path for reduction over a 3-year period. So it is not that the reduction is expected overnight. So that is also a choice. And as I have said before, as we attain scale, some economies of scale would start kicking in, in terms of our own operating expenses, which we are also seeing presently, even the present scale at, resulting from the 27% growth is giving us some say. If we look at it, our expense structure is lower than what it was in Q1. So from Q1 to Q2, we had a 3% drop. And from Q2 to Q3, we have had a 1.9% drop. So this benefit should start also healthy. But to answer your question whether all these will take us to 30% overnight next year, the answer is probably no. But we would -- we'll be on the glide product towards converging to the circulated number over a 3-year time frame.

Okay. Sir, so basically, is it safe to assume that maybe somewhere around '26 or '27, you -- well, '26 or '27, you will ultimately achieve closer to 30% kind of a figure in the OpEx ratio.

Yes. That is -- that will also be a regulatory requirement. The window is 3 years. But we need to have our plans drawn up to converge to that by that time frame.

And when you said crop, sir, I just wanted to understand that in crop, you intend to have it very closer to your overall market share of the company, your exposure? Or you are okay to go a little overboard? And I also want to understand that in crop, given you're relooking into it, it will be more into that 80, 110 formula only where you will do or you are okay to do in the normal way of doing crop also?

These are one as a proportion to our total top line, we would like the crop insurance to be somewhere in the 10% to 12% range is what we would like to have, not to be excessively dependent on that line. It would be the broad guidelines, that is yes. And number two, we will also have to clearly look at the guidelines, the crop insurance guidelines that the government is expected to come up with relating to the various methods that are there. Today, we do have the last corridor options that are available. And there are pros and cons of doing the last corridor method as well as the conventional PMSBY, which will have to be evaluated.

Okay. Fair, sir. And the another question which I had was basically, when I see your -- one of the slides where you mentioned that your market share in the new 2-wheeler is 8 percentage, which I believe, at the start of the year that is in 1Q FY '23 was 10 percentage. So it has come up a bit. So anything to read there, sir? Is it a conscious decision where you have lowered your market share because of the intense competition? Or in general, it has become a crowded space, and that's why you saw a reduction in the market share? And if I want to connect it with the Chola Insurance Express offices, which have come down from last year of around 500 offices, to 350 kind of in offices, has that also played a role? This is a broader picture, if you can -- or both are unrelated, basically, if you can tell me on those lines, it will be helpful, sir.

This is the market share in 2-wheelers. It's a function of the competitive intensity and the economic liability given the pricing under discounts. So we have pruned our presence in some geographies and in some product categories, make, models to taking a granular look at the loss experienced and the related costs, taken costs, yes. That is what has come about there. And we -- some of the -- it's a 2-way moment when you look at even the -- our location presence. While we have stepped in and got into newer locations, some locations, which probably haven't really grown or haven't, like, lived up to the potential, so we have also taken a call to reduce our presence in some of these locations. So that is, I believe, a constant evaluation of market-related opportunities that exist. It is what the teams have been doing.

Sir, that is become the reason why your motor-only loss ratios have come down to 68% in the sense that calculation -- the fact recalibration of the...

It is a function of that as well, very clearly because we have made our choices and those choices seem to be working in terms of managing the overall loss ratios, and these are not 1-quarter choices. These are continuous choices that we make, because any choice that we make lives with us and casts its shadow for at least 1 year. And in case of long term, it'll have a shadow of 3, 4 years. So these are continuous choices that the teams make.

Got it, sir. And maybe finally, if I can ask a data-keeping question, how much of our total premium is now from long term in our GWP in the current 9 months or third quarter of FY '23? And finally, one more…

I'll ask Venu to answer that.

So the position as of December 22, we are carrying INR 1,351 crores of the premium, which belongs to the -- what is the percentage of the premium in the -- it's about 8 -- roughly about 8.8%.

No, actually the embedded asset 9 months is at about 9.8%.

9.8% is right, sir?

9.8%.

Okay.

For our year '22, [ Q3 ] it was about at about 3.7%. So it's more or less settled at -- now at about 9.7%, 9.8%.

[Operator Instructions] We have our next question from the line of Yash Meta from Steinberg Asset Management.

One question on what was reported last year. So if I look at your March presentation in '22, there were 2 one-offs, INR 200 crores of COVID claims and INR 263 crores of IRD order impact on write-off of deferred acquisition cost balance. That INR 463 crores ideally shouldn't have continued in the current year. So one would have expected that about INR 100-odd crores per quarter would be added to the bottom line of the company from last year to this year, but the actual translation has been closer to 20% of that in terms of improvement in what our absolute numbers are. How do you reconcile the one-offs and look at the steady-state profitability? Because even today, our ROE is not reflecting the old ROE levels, pre-COVID ROE level.

Yes. To answer the question on the INR 463 crores, which you have talked about as a part of health COPID and prepaid expenses, which we have written off in the last '21, '22. See, there are things which are happening as a part of the motor third-party claims, okay? There are benefits that were flowing the in last year in the form of the lock-down benefit and other things, which is also not there. There are -- and there are costs associated, onetime costs. There is a onetime benefit also flowed in the last year that was not there. And you know very well that the motor third-party, there is an inflation. The premium increase is not much in the -- other than the long-term part of it. So with that, the inflation element itself is costing us more, PA. This one portion as a part of that as a reduction. Second part is also that the growth is around 28%. The long-term share, we have already said that around 9% to 10% on the mix is also there. Coupled with that, there is no prepaid concept that has been followed in '22, '23. The entire absorption is taking into the P&L part. So just -- I'm not putting the numbers here. There are positives and negatives there in the earlier part. There is an element of continued level of the growth is absorbing the cost also is part of the this and that. This will create an embedded value there as part of which the earnings will come into the next [ pivotal ] cost.

So do you see, let's say, improvement in our ROE from here on? Because the way it seems we are increasing the share of crop business, and that's probably not as profitable as the overall business today. And on top of that, we are kind of adding, let's say, the long-term policies continue. So just want to understand if our ROE will see pickup and where do you see it stabilizing?

Definitely, the ROE will pick up because the growth in '22, '23 is around 28%. We are more than the industry from that point of view. you. That's why -- the earnings will take time. Coupled with the long term, it will take a long time for us to take the profitability. So ROE will improve in the next period onwards. But we have already improved in terms of the ULR already, as said 20% of the thing only improvement is there. That is only because of the point on the growth and the long-term point of view. And also on the TP front, the inflation is there. So coming years, definitely, you'll see that the ROE to improve, because already, every growth-based acquisition is absorbed in the current year.

Understood. And what you've seen is your partners like IndusInd Bank and Chola, their [ diverse linked ] vehicle finance have been absolutely stunning for the last quarter on. But when we look at that translating into our growth from these channels, it's not really coming through that well. So are there nuances which I'm missing here in terms of why our growth from these channels is not reflecting the growth that they have seen in their books? Because they have started lending to acquire these vehicles, so ideally, one should see them selling insurance on these vehicles.

Yes, to -- I -- your observation is partially right to the extent that in the case of new vehicles, the control over the insurance is with the dealers, whether it is cars or two-wheelers or OEMs. The financier's control over that would be definitely lower. So the financier's control always comes in only in the case of medium to term in used vehicles very, very certainly and in case of new vehicles in the later years. So to that extent, it will not reflect directly because that business is anyway is market related, which is controlled by the OEM and the dealerships. So it will not reflect the immediate increase in disbursements, it's not going to reflect directly in an insurance stream.

Understood. And given, let's say, the implications of the expense on management regulation that the regulator has now come up with, we've consistently, over the last 2 years, have had money from shareholders' account getting transferred to the revenue account. How do you see the implications of this on us? Because this is relevant to us because we are above the 30% mark, which is -- how do you see it? Is it a positive? Is it a negative? How do you approach this regulation? And will it benefit you gain, cross-subsidize better? Would it -- I'm just trying to understand from a strategic perspective.

See, from your strategic perspective, it only clears up the compliance-related aspects greatly. From a market perspective, the sourcing cost is not really going to reduce. The intermediary ask is not really going to reduce. So it's more a question of how nimble players are in choosing the geographies profitable and yet are able to manage both the loss ratios and the cost. So the game is all about managing your overall combined ratio and not really to look at any element in isolation. So we cannot say that you may have a higher cost. But if your loss ratios are okay, then it justifies it. So the economic view is what players would start taking, which is what they have been taking as well, and that is how business would be run. In that sense, the EUM has -- the freeing up the EUM and the flexibility being given to insurers and insurer bonds is a welcome stop.

Thank you. We have a next question from the line of Devansh Nigotia from SIMPL.

Yes. In case of health insurance, what you're seeing that everyone is going for 20%, 25% price increases. So can you just help us filling with a perspective on how is everyone in the -- all the players, how they are taking price increases? Can you just throw some light on that and you have taken 30%, 25% price increase...

Your line is not clear, Devansh. Could you please speak on into the mic or, yes...