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

Ladies and gentlemen, good day, and welcome to the Cholamandalam Financial Holdings Limited Q4 FY '23 Investors Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note this conference call is being recorded. I now hand the conference over to Mr. Praveen Agarwal from Axis Capital. Thank you, and over to you, Mr. Agarwal.

Thank you, Vikram. Good morning, everyone, and welcome to this earnings call. From the management team, we have Mr. Sridharan Rangarajan, Director; Mr. V. Suryanarayanan, MD; Mr. S. Venugopalan, CFO; and N. Ganesh, Manager and CFO, to basically discuss the key highlights of the results. I would request Mr. Sridharan to give his initial remarks. Over to you, sir.

First of all, good morning to all of you, and thanks for taking time for participating in our call. I have with me Suryanarayanan, MD of Chola MS; and Mr. Venugopalan, CFO of Chola MS; and the CFO of our company, Mr. Ganesh. The consolidated total income for Chola Financial Holdings for the quarter ended March '23 increased by 39% to INR 5,281 crores, while the profit after tax decreased by 51% to INR 901 crores. The consolidated total income for FY '23 increased by 25% to INR 18,376 crores, while the profit after tax increased by 26% to INR 2,810 crores. Cholamandalam Investment and Finance Company, you might have attended the call, where the details on the presentation and transcripts were available, but I'm sure you've gone through that. I'll just give a broad highlight of that. CIFCL gained market share across product segments in vehicle finance and other business units. Disbursements were at INR 21,020 crores for the quarter ended, which went down by 65%, and INR 60,532 crores for the full year, went up by 87%. Total AUM stood about INR 112,782 crores, which is up by 36%. The profit before tax for the full year was at INR 3,600 crores, went up by 25%. Asset quality also improved from 3.51% in December '22 to 3.01% as of March '23. Cholamandalam MS General Insurance had a gross premium of INR 1,776 crores in Q4, increase of 27.9%. And the company crossed the INR 6,000 crore mark, and they did INR 6,200 crores for the full year, an increase of 27.6% over the last year. I will also request Suryanarayanan to make a brief comment about Chola MS General Insurance, and then we will open up for Q&A.

Good morning, everyone. Thanks, Sridhar. As was mentioned by Sridhar, Chola MS recorded a GWP of INR 1,776 crores in Q4 and INR 6,156 crores for the full year. The growth rate at 27.6% was strong and compared to the multiline insurers' growth of 16.3% meant that Chola MS enhanced its market share to 2.87% amongst multiline insurers. The growth was across all lines of business with growth rates of 33.4% in fire, 26.8% in motor, 36.7% in health and 16.7% in personal accident line of business. The company grew across all its channels. In its captive channels, business from the sister company and the Insurance Express outlets grew by almost 20%. Bancassurance business grew by over 50%. And with the addition of new tie-ups in Tamilnad Mercantile Bank and South Indian Bank, growth from the new channel acquisitions across OEM platforms, financial partners help attain the strong growth. Chola MS investment portfolio corpus was at INR 14,680 crores. And with no net exposure to stressed assets, meaning that all of these stressed assets have been fully provided for. Recoveries from the fully provided exposures in IL&FS and Reliance Capital would be recognized on a cash basis as and when it happens. Chola MS registered a combined ratio of 104.2 in the quarter and 109.3 for the full year. The claims ratio for the quarter was at 70.8 and for the full year at 71.2. The company ended the year with a profit before tax of INR 264 crores, solvency ratio of 2.01x. With a net worth of about INR 2,160 crores, Chola MS owned reserves over the years constitutes about 81.5% of the network. That, ladies and gentlemen, is the summary of Chola MS results. We shall now open the floor for questions.

[Operator Instructions] We'll take our first question from the line of Atul Mehra from Motilal Oswal Asset Management.

Sir, just one question in terms of -- at a broader level, if you look at the listed entity, are there any plans in the medium term or the near term to unlock value for shareholders from the perspective that -- there's just 2 entities: one is Chola, which is a listed entity; and the other one is the General Insurance business, which perhaps can be listed at some point in time. So I ask, given the substantial -- in terms of discount the company paid back to underlying value. So just thoughts around this will be very helpful, sir.

Thank you. I think this question has been posed to us every now and then. I think as we stated earlier, our aim is to carry out both the business well, and that's the primary objective of management. Both the businesses have NBFC and general insurance are doing really well at this point in time. And we would like to present how they have performed, what's the future hold for them. And it's up to the investor to take a look at it and value the company accordingly. And we will stay with that stance as we earlier stated.

Right. Right. I understand the perspective there on business performance. But is that -- at a Board level, is there any -- in terms of discussion on this particular point, given the like substantial value that can accrue to the shareholders of this entity, if and when an action is taken. So just trying to ask more particularly about the structure of the entity rather than underlying performance. Underlying performance, I'm sure, obviously doing very well there.

As and when the Board takes a call, definitely, we will get back. As of now, no such discussions.

Got it, sir. And sir, secondly, for the GI business, is there a listing plan? Because there are a number of other GI companies which are listed, so from that perspective, anything on that particular element?

Look, I think if you look at the capital adequacy of GI business and capital required for its growth, both in terms of the insurance business as well as some of the investment they would like to make in terms of, let us say, computer -- sorry, software upgrades and some of the digital assets that they would like to own and then improve the productivity of the business, they are adequately capitalized. And we feel it is enough and more that they can definitely look at for the growth trajectory what they have been projecting at this point in time. So definitely, as and when we have such a plan in terms of requirements of capital, we would definitely look at it. Our joint venture partner has a similar view, and I think we will explore this as and when we feel definitely there's a need for us to do.

Okay. Sir, just one final question on GI. In the sense that maybe at some point in time, we can look at a universal license or in terms of GI companies being allowed to do other insurance products. So is there a plan to get into life insurance at any point in time and as and when this opportunity path opens up? Or it's too early to talk about it?

So I think we are definitely observing the developments in this space. But I think we require more granular details, which is awaited. I think most of the industry is waiting for such details. And then we would take an appropriate call depending on how the guidelines would evolve. And based on that, definitely, we would take an appropriate call on that.

We'll take our next question from the line of Devansh Nigotia from SMIPL -- SiMPL, I'm sorry.

Sir, congratulations on a good set of numbers. Sir, in case of operating expenses ex commission, the run rate has actually started to moderate despite higher growth. So as a percentage of net written premium, it was hovering around 42%, 43%. This quarter, it's around 40%. If you can just help us understand, are there any diversion or -- are there any change in marketing expenses? Where are these savings have started to come from? And internally, how do we see this number shaping up?

Yes, if you are talking about the [indiscernible] 33.4%. And for the YTD, FY '23 is 38.1%. We have been able to reduce from the previous year Q4 from 38.5% to 33.4%. It's basically the reduction is on account of higher growth in the GWP and corresponding NWP part, as well as there is whatever the savings that are possible in the acquisition cost. These are all the 2 elements that have led to a reduction in Q4. We continue to examine the reduction in the expenses of management and by way of reducing the acquisition cost as much as possible through the -- in spite of our business growth.

So there is largely the marketing expenses, the customer acquisition call that you're talking about?

Yes, yes. Let's say other fixed costs are -- will also come down basically because of the top line growth. You can clearly see that the top line growth in the Q4 also has resulted in the reduction in the acquisition cost as well as in the expenses of management.

So sir, what we understand is that because of higher competitive intensity in motor insurance all leading to such high customer acquisition cost for us, so any comments that you can give on the competitive intensity on motor insurance and how it is shaping up, also how are we participating in this competitive intensity before and how now we are participating in the competition right now.

As I've mentioned before in earlier calls as well, competitive intensity in the industry for all lines of business continues to be high, and motor is the section like that. But what we are beginning to see is some tightening in the market in terms of the pricing of our discounts. And with the advent of OEM limits coming in effective April 1, we do see that some of the larger players are more conscious of what is being put out in the market, which is good for the industry and good for almost all players there. Given the trend of motor OD loss ratios, this reduction in discounts is something that is badly required for the market. And Chola MS, as the fifth largest player in the motor line of business, is more than happy to sail in this direction of reduced discounts.

And sir, now that we are at an AUM of still very high, around 40%, 41%, and the regulations are given a direction to come down to 30%, so this 10% gap, where do you think how we can bridge this gap, which line item where maximum savings will come from? So some thought process on savings incrementally -- savings initiatives that we undertake?

Yes. So the expenses of management is always seen in relation to gross written premium and, therefore, should not be confused with the [ CVaR ] computation, which is based on net return premium. Look, the -- as against the 30% limit that we have from effective April 1, 2023. We are at about...

36.

On a comparative basis?

Yes. We were at 36% in March '23 compared to 38 in March '22.

Yes. So the point is the number is 36, which is there even in our published numbers. And our comparative number from the previous year, it's about 2% down. The regulation had also prescribed the 3-year glide path, for which we do have a plan for a continuous reduction over the next 3 years to conform to the 30% limit. The Board has eased up the matter, and we should see our cost structure going down the glide path as planned.

Okay. But which line item do we think can have maximum possibility of savings?

It will have to be across the lines of business. Besides, there will be some advantage that will accrue to the company by share growth in sites. As I have maintained before, our operating expenses will now get absorbed better on a larger base, which will also provide some relief in terms of the overall AUM.

Okay. And in case of commissions, the run rate is lower by 1% to 2%. So if you can help us understand in the same vein?

Can you repeat the question?

Commissions, normally, the run rate is around INR 35 crores, INR 40 crores, a gross written premium of INR 1,500 to INR 1,700 crores this quarter, gross written premium was INR 1,767. But our commission expenses were just INR 15 crores, so delta of around INR 25 crores to INR 30 crores is there against the normalized run rate. So any reversion or why is this run rate so low?

So commission is as per the -- if you are talking about the Q4, am I right?

Yes. Yes, I'm talking about Q4.

Q4. That's as per the early part of this thing. So if you are talking about the commission net, please understand that if you are looking at the revenue account, commission net, it consists of both RI commission as well as the gross commission. Okay. In the Q4, there are various treaties running on a sliding scale basis, wherein based on the last ratio at the end of the year, there will be an RI commission accrual that will come as a part of additional, hence, the net commission looks lower. Actually, this has to be seen from the point of view of gross and the net. The net is of RI commission.

Let me explain. Chola MS, conservatively, it makes the insurance commission through the year. And when numbers get crystallized at the end of the year, it recognizes the full reinsurance commission as per the treaty. So naturally, you will find that the quantum of reinsurance commission that gets recognized in Q4 is generally higher as we do adopt a very conservative method of recognition. But then at the full year level recognizes the effect of operations for the full year.

Okay. Okay. And sir, in the case of -- or when you look at all the segments, fire, motor and health, our business momentum is stronger than the industry and strong market share gains continue. So if you can touch upon individual segments, what are we doing differently that is helping us gain market share, whether in fire, also motor and health, that would be really helpful.

So let me begin with fire. So fire, there are a few drivers that have helped us grow. One, our volume of business from the bancassurance segment has gone up in the previous year. And with the new tie-ups coming, it should help in the current year. Besides in fire, our newly set-up verticals for SME business, our volumes from the larger Indian corporates has also grown well over the last couple of [ years ]. In motor, we have this very visible company tech that is out. We have diversified the portfolio. We are now part of most OEM programs in cars, in 2-wheelers and which has helped us diversify and grow in cars and 2-wheelers, which help us enlarge the pie in terms of the motor business. Health, again, we are seeing being put the bundled attachment health benefit business. And our growth in the health indemnity has also been there though still the proportion is smaller as compared to the proportion in the benefit business. So these have been the drivers.

[Operator Instructions] We'll take our next question from the line of Swarnabha Mukherjee from B&K Securities.

So 2, 3 questions. First of all, on the channel side, I wanted to understand what transpired in the broker and the direct channels. So broker, as I see, has been quite a good growth driver for us in the previous quarters. But this time, the numbers came in a bit low. So anything specific to read out there or would it continue -- would we bounce back going ahead? That was my first question. Same for direct. Second is in terms of the fire business. So with run rate-related changes that has happened, is there any initial trends that you could highlight? It would help us to understand the currency value. And thirdly, in terms of the motor business, so I see that a last part of the growth has been driven by private vehicles given that the competition level we hear about is very strong there. So how should we think about in terms of our loss ratio for the segment? Also from the fact that we are also starting to see growth in the CV business to come back, so how should we think about the loss ratio in the motor segment in the upcoming quarters? And given that it has seen slight elevation this time, what will be the factors for this? So those are my questions, sir.

Look, on the brokers business, brokers business reflects the volumes that we get in motor from the OEM types, the retail broking entities as also the volumes that we get for the commercial lines of business. Generally, we'll see that the commercial volumes are lower in Q4. So as compared to the other quarters, people wait for the volume, and business happens on April 1. So that's the really broader trend as far as the broker volumes are concerned. On the fire business, yes, with IIB benchmark rates going away effective April, we have seen a dip in the property premium pricing. It's not just for us, it's there for the entire industry. One set of segments, what we charge for the pure fire and earthquake rates, that has come down. But the pricing for the STFI risks, so that has actually gone up, which is for the storm, tempest, flood and inundation. So that segment has gone up. The combined effect is that we have seen about an average price reduction of about 8% to 9% for us in April. The numbers for the industry in the fire line of business is out. Actually, it is -- I can see that the overall growth in this line of business itself has been rather muted this year as compared to the previous year, which means this effect is going to be there for everyone. On the third question relating to motor, I think now we have reached a stage where the mix between the 3 categories of 2-wheelers, cars and commercial vehicles would more or less settle down. As you have rightly mentioned, the volume in commercial vehicles will be better this year, which is the wider expectation. And given Chola MS' traditional strength in this area, both arising from the sister company as also the other larger tie-ups, we do expect the proportion of commercial vehicles to go up, leading to a slightly amended mix as we -- from the one that we see now.

Yes, sir. So just wanted to come back on the last question. What I wanted to understand was also your thoughts on how the loss ratio might shape up because of this change in the mix. And also, as a follow-up to the previous question in terms of fire segment, I wanted to understand that given that this year for reinsurance rate, it's a seemingly hard market, so possibly, the rates might not go down very significantly. But is there a risk that when the cycle changes and we move towards the softer market, the impact, what we have mentioned, of 8% to 9% can be more?

First, on the motor loss ratios, see, it's now even for the industry and fire, we have been around this stable mark of around 68 to 70, which has definitely gone up by at least about 10% as compared to the numbers that we used to see, say, a couple of years back our pre-COVID period, so which is the effect of price discount. But as we've stated earlier in the call, so market is seeing some tightening with respect to discounts and pricing. Hopefully, we should see that helping the loss ratios as we go along at least -- but then what we have to counter is also that the parts prices and labor prices are also on the increase given the inflation in the country. So this price increase could effectively neutralize such price hikes in the material and labor parts. So that's the broader direction that I would like to mention on the motor -- in that part. And coming back to the fire, yes, reinsurance rates have gone up across the industry. And hopefully, one can expect a softer regime if overall losses across the globe are down and in India also if we are fairly better off on the cat losses. Last year, of course, the increase for the Indian industry was more a reflection of the higher loss levels across the globe and not necessarily a reflection of Indian losses. So a good year on the Indian subcontinent would mean that, hopefully, the rates will pull up.

Sir, so will that, can that result in like we mentioned that in the pure fire and earthquake rates that has come down because of the [indiscernible]? Once the reinsurance market turns soft, can there be a higher negative impact coming out of this?

I'm sure, yes, corporates would seek a price reduction at that level. It is fair to assume that corporates would seek a reduction if loss ratios continue to be low and manageable.

We take our next question from the line of Sanketh Godha from Spark.

Sir, in the previous quarter, we alluded to the point that we might get into low-OpEx products like crop or even commercial lines to some extent to achieve the glide path of 30% within a 3-year period. So it still remains the same or we believe, with the existing business model, we can reduce it to 30? That's my first question.

The company has started participating in the tenders for crop insurance. So it's -- we are planning for a portion of the business to come from crop, which incidentally would also help us on the glide path.

And any internal target you have set to the crop as a percentage of the total business, beyond which you might not be comfortable doing it?

We would ideally like that to be around, say, sub-10%.

Okay. Perfect. And the second question, sir, was that you -- to a previous question, you alluded that the acquisition cost will come down. And if I see in the fourth quarter, the marketing spend, which was around INR 260 crores in third quarter, has reduced to INR 219 crores. So sir, I just wanted to understand that is it that we constantly reduced our exposures to the products, will the acquisition cost be higher, probably like 2-wheelers or car, where the competitive intensity is higher? Or is it largely -- just wanted to understand that capital business increased, and therefore, the marketing expense were lower, if you can give the granularity. The reason why I'm asking this question is that this 104 combined improvement predominately happening because of the expense ratio improvement. So just wanted to understand the durability or the sustainability of this combined to remain at 104 or what you guided for maybe '24 kind of a number.

Actually, it's a combination of both. The advanced volumes from our capital markets, sister company as well as our Chola Insurance Express outlets, plus paring off high-cost businesses from certain quarters, it's a combination of both is what has contributed to this.

Sir, let me -- sorry to interrupt, sir. So if capital volumes are seasonally or, due to any reason, are higher in fourth quarter and if the contribution from a full year point of view, capital business remains similar, then from a full year point of view, that 38%, 36% is from AUM point of view, will improve -- is the whole point and, accordingly, what would be the likely combined ratio you are expecting it to be.

We ended the year at, as I said, about 109% of combined ratio for the year. While it is certainly not a guidance, we would certainly want to reduce that by at least 200 to 250 basis points for the current year. I think that is the broad direction that I would probably say that we would be working for here.