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

Ladies and gentlemen, good day, and welcome to the Cholamandalam Financial Holdings Earnings Call Q2 FY '24 call 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. Thank you, and over to you, sir.

Yes. Hi, hello, and very good morning to all of you. We have with us the entire management team of Cholamandalam Holdings today to discuss their Q2 FY '24 results. From the management side, we have: Mr. Sridharan Rangarajan, who is a Non-Executive Director; Mr. N. Ganesh, who is the Manager and Chief Financial Officer; Mr. V. Suryanarayanan, who is the Managing Director of MS General Insurance; and Mr. S. Venugopalan, who is the Chief Financial Officer of Cholamandalam General Insurance. Without further ado, I'll hand the call over to management for their opening remarks, followed by a Q&A that we can take. Over to you, sir.

Thank you. Good morning to all of you, and a very Happy Diwali and advanced Happy New Year to all of you and Merry Christmas. I have today with me Mr. Suryanarayanan, our MD; and Mr. Venugopalan, our CFO; and Ganesh, CFO of the company, with me to talk to you and address all your questions. Chola Financial Holding, you see the final dividend for FY '23 in this quarter. The total income for the quarter was INR 29 crores against INR 28 crores in the corresponding quarter last year. The key highlights on Cholamandalam Financial -- Finance is very well covered in the call hosted by them as well as the investor presentation they posted. I think one of the key highlights is CIFCL launched a composite QIP. They issued INR 2,000 crores at a price of INR 1,180 per share and the compulsory convertible debenture of INR 2,000 crores, overall aggregating to INR 4,000 cores. The funds from the investors were received on the first week of October '23 and the allotment was completed on 5th of October. And thereby, the capital adequacy, which was at 16.62% as of 30th of September '23, moved to 20% effective from 5th of October. I will request Suryanarayanan to cover about Chola Insurance performance and then we'll open up for Q&A.

Good morning, and my festive greetings to all of you. I shall now proceed to give you a brief overview of the performance of Chola MS for the quarter and the half year. In quarter 2, Chola MS recorded a gross direct premium of INR 1,989 crores with a growth rate of 35% as against the multiline insurers' growth of 25%. The gross direct premium includes INR 290 crores of crop insurance premium, taking the organic growth from other lines of business at about 15.3%. The expenses of management for Chola MS was 29.6% in Q2 as against 35.7% in corresponding quarter of previous year, which is a reduction of 6.1%. The claims ratio for the quarter was 73.84% as against 72.5% in corresponding quarter of previous year. The quarter 2 claims also includes the crop-related claims provisioning and an increase contributed by about 1.1% from cyclone and nat cat event claims. The combined ratio [Audio Gap] as against 112.39% in the corresponding quarter of the previous year. At the half year level, Chola MS has recorded a growth of 32.8%, helping its market share to climb to 2.98% against multiline insurers. The company has grown across all its channels. In its captive channels, business from the sister company and the Insurance Express outlets, our volumes grew by about 23.3%. Bancassurance grew by about 6% and growth of 29.7% from other channels. Chola MS investment portfolio corpus as at September was INR 15,649 crores and with an investment income of INR 538 crores for the half year. With no exposure to stressed assets, recoveries from the fully provided exposures in erstwhile stressed assets such as IL&FS and Reliance would be recognized on a cash basis as and when it happens. The PBT for the half year was INR 219 crores as against INR 98 crores in the corresponding half year. The ROE for the half year annualized has progressed to 14.61%. We'll now be happy to take any questions that you may have.

[Operator Instructions] The first question is from the line of Sanketh Godha from Avendus Spark.

Yes. Sir, I have a few questions basically. Sir, in the previous call, you said that crop, we would be expecting to be around INR 500-odd crores. But we have done INR 290 crores. And first half is typically very strong in crop insurance. So the target of INR 500 crores could be achieved or this is the number what we are looking for the full year? That's my first question. Or if you want, then maybe I can ask a subsequent question, sir.

Yes. So in crop insurance, of course, you are right that the [indiscernible] is much stronger in terms of volume. I would tend to peg the overall crop volumes for the year at somewhere around INR 450 crores is what I would expect.

Okay. And the 103% combined, what you reported, maybe it's largely provisioned. So you expect it to come down below 100% or closer to 100% kind of a number. Because this what we wanted to understand, given we have returned largely in that 80 to 110 percentage corridor, can we expect it to improve or to be on similar lines for the full year?

One, we do have reinsurance protection in excess of 100% and the 103% also reflects the reinsurance protection costs. So our estimate is that it cannot worsen from this level.

Perfect. Perfect, sir. Sir, second question is on health insurance. Honestly, for me, these numbers are a little concerning because your health loss ratio, as you see, it is still 85 percentage. And there was a time, before COVID times, we used to write this business at less than 60% loss ratio. But now though it has improved from COVID times, but 85% seems to be still on the higher side. And given we have a decent exposure to benefit-based health, which should pull down the entire loss ratio, just wanted to understand why is the numbers are still relatively elevated compared to ideally it should be? And sir, related to it, if you can give the breakup of health broken down into benefit-based group, group indemnity and retail health.

See, as we have been saying, Chola MS still is not so aggressive in the group health employer-employee. While we have grown, I think, in the industry, we are probably the second lowest in terms of the group health employer-employee volume. So there is no fundamental shift in our stand towards employer-employee group health. Our health in retail health mix is about 58% indemnity now and 42% benefit, which has been more or less the same. Maybe the benefit was slightly higher at about 50%, 52% earlier. Now it's come down to about 42%, 43% currently. In the indemnity health, you are right in that some of the -- especially the public sector bank portfolios, they have behaved quite differently in this quarter. So we have been pursuing for another round of price change, which is under discussion. So we should hopefully be able to push them through in the current quarter.

Okay. Just with this 42% as benefit base, sir, I believe we would like to have it below 70% as a loss ratio. So just wondering, after price hike, can we expect, maybe not current year, next year to have similar kind of a loss ratio in health or it will remain? Is your comfort zone is 80% or you expect it to go below 80%?

We would certainly expect the LR to come down as a combination of two factors both arising out of the price correction in the indemnity side as well as the volume increase in the benefit side. So together, we do expect that the overall blended LR should come down.

Okay, sir. And sir, two more questions. Sir, on solvency, now it has come to 189 percentage. I mean, honestly, the growth has been very strong, probably higher than your ROEs, what you deliver. So it has consumed your capital. Sir, just wondering, given it is 189%, any way to manage the solvency? Or you think if you sustain the current growth ex of crop, which is around 22% for the half, then any plans to increase capital to sustain growth? Or how you are thinking on these lines, sir?

See, you are aware, Sanketh, that we do -- when push comes to shove, we do have the option of augmenting Tier 2 capital. So the revised norms gives us some more headroom by which we can certainly raise without disturbing the equity capital structure. So I think at an appropriate time, the Board may consider relevant measures based on our own business plans.

Got it, got it, sir. And on EOM, you highlighted in your initial remarks that EOM came below 30 percentage. But largely, it happened maybe because you did a decent amount of crop in the coming quarters as a mix. But naturally, crop contribution from second half would be lower. So that EOM of 30% can be still achieved for the full year or it's more an FY '25 target an EOM below 50%?

See, what I would like to say is that we are doing better than what we had even committed both to the Board as well as to the regulator. You are right in that the crop has given us that advantage in terms of a lower EOM and with a lower government business in H2. So we could see the EOM rise from the current level, but it will still see -- you will still see a good reduction from our previous year's level. At this point, I would only like to say is that we are committed to converge to the guidance that we have given both to our Board as well as to the regulator.

Okay, sir. Last one, your combined is 110.5% for the half. Just wanted to understand that -- if it is expected. Because I think you gave a guidance at the start of the year to be closer to 105%, 106% kind of a number. You delivered very much better number in fourth quarter last year. Sir, just wondering, sir, this number, how do we see -- and it will be driven by better loss ratio from the current levels or you expect the expense ratios to improve ultimately and we can get closer to this thing? And honestly, this question I'm asking because we don't have motor TP price hikes. There is a possibility that motor TP price hike might not be the next year for first half because it's an election year. So sir, just your thoughts on how combined will move considering these points?

See, you would have noticed that Chola MS reports a motor TP loss ratio, which is fairly secular across the quarters. And we do not have any volatility in motor TP provisioning between the quarters. We take the annual view and then keep providing for it through the period. So that's been our methodology over the years followed quite consistently. On the COR, you will find that even at the half year's level, so about 1.2% or so is the impact of the nat cat events. While these are expected in the insurance business, but this is still -- you could consider it as an exceptional kind of a charge that has come in, in the current year. If I remember right, we had only given a guidance of somewhere around 107%, not 105%, 106% as you mentioned. And I think we are probably still it's possible in the current year.

And next year, sir, given the price hike might not be there for large part of the year?

This industry is such a fluid situation where things keep changing. I think we won't hazard to give any indication of COR for next year and thereafter. But the point that you mentioned on motor third party is quite valid. The industry has received a very paltry correction over the last 4 years, and it's perhaps a pressing need now for some correction to happen at the earliest.

[Operator Instructions] The next question is from the line of Nidhesh, who's from Investec.

In the motor own damage segment, our loss ratios are around 73%, 74%. And my belief is that with this sort of loss ratio, this will be a very low ROE or negative ROE business for us. So how are we thinking about this line of business? And what are the desired level of loss ratio in this segment for us?

Yes. If you look at the page -- where we are only at Page 54, Page 54 of the presentation deck, you will see that the motor OD LR, I'll answer it in two parts, first, the motor own damage section and then motor TP section. The own damage section, you will notice from the footnote that from a Q1 level of 74.9%, it's come down to 72.7% in Q2. And even if you look at the previous years from our H1 level of 73%, it came down to 71.7% by the end of the year. So generally, we have seen that the H2 motor OD LRs are lower and we see that pattern going that way even as we -- even for the current year. So motor OD loss ratios, one can say that while on a steady-state basis, one can reasonably expect it to be about 67%, 68% is what one can expect. But TP, I just answered to the previous question of Sanketh of explaining the situation. So that, until I think we see the price increase really happening, we can't see an LR lower than that. So it's going to be very difficult to manage the LR below that. On the ROE from motor, you will find that it is motor which gives the investment corpus accretion. And one will have to really look at it from that perspective on what kind of investment income is generated from the corpus coming from the motor business, and that's how the driver of the business in terms of its overall economic profitability should be determined.

Yes, sure, sir. So there, the investment book is largely coming for motor third party. So I was just referring to motor own damage segment, where the LRs are reasonably high and float is also much lower. And hence, at the current level, it may not be very profitable business on a stand-alone basis. But yes, sir, point well taken. Sir, the second is if you can share the mix of motor business in terms of two-wheeler cars and private cars and commercial vehicle.

Yes. We -- at this point in time, we have a private car mix which is running at about 41%, 42%. And then it's there in Page 56. So you will find that the car is at about 41.5%. Commercial vehicles is almost equisized at about similar percentage and two-wheelers is at about 17%. We will find that the festive season is largely [ extreme ] season. So you will find that the two-wheeler inching up perhaps to about 18%, 18.5% by end of the year, but this is more likely to be the composition. So what you see is over a period of time now the rate on commercial vehicles has now come down to about around the mid-40s and the rest is cars and two-wheelers. But given our channel mix, our own sister company association and otherwise, we expect this mix to more or less stay at this level or maybe plus another 2 percentage points this way, that way.

Understood, understood. And sir, lastly, any comment on the competitive intensity in the private car segment? How is the competitive environment in terms of pricing and payouts?

See, competitive intensity is always there in the Indian market, and it's always there. And what we are seeing is that some players are behaving very sensibly given the higher loss ratios. Accordingly, the pricing and payout has been tweaked. We have also gone down that path, which is why you see some of the EOM costs coming down. Even bereft of crop, we have seen a reduction in the EOM largely because we have toned down what we pay out in the market. So that much is there and -- which has a direct effect on the growth. So if you look at the growth rate in motor of different players and related to the industry, you will get an idea. For us, the motor volume growth in Q2 was 13.5%. The industry growth was 13.9%. So we are just keeping pace with the industry growth, not really wanting to be aggressive in a highly competitive environment.

[Operator Instructions] The next question is from the line of Anand from WhiteOak.

Sir, I just wish to understand of the vehicles that CIFC finances, what is our market share in the insurance that would be purchased by those vehicles? And how has that number been trending over, let's say, last few years?

See, you would notice that in the motor space, Chola MS has almost a 5.4%, 5.5% market share. And it is well diversified. While CIFCL is a large component, but our channels are really wide in terms of our agency presence, our own Chola Insurance Express outlets, the OEM business, the other financial business. And as we have disclosed somewhere, our volume from CIFCL is roughly about 10% of the overall top line. And that's not just motor, it's also across multiple lines of business.

Sure. Sir, I was just trying to understand whether we have, let's say, a first right of refusal of all the loans that Chola originates and the insurance that might be commensurately purchased in that entire context. And do we have first right of refusal? And what is our market share in the business that Chola does on the general insurance, particularly the motor vehicle side?

I have addressed this question even in one of the earlier calls, where I've clarified that when it comes to the new vehicle financing by CIFCL, even their share, their hold would be limited because that business would go through the dealer network, which is part of the OEM program. So -- and there, the ability to offer multiple options, including Chola MS, would be higher in a used vehicle financing. And I should say that our penetration level in used vehicle is fairly good and growing.

[Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for the closing comments.

Thanks, everyone. I think Chola MS has been growing well. Over the almost last 10 quarters, we have had a growth higher than industry. The various pieces of the jigsaw puzzle are now quite in place. So we believe the team is quite confident and optimistic about carrying this further into subsequent quarters. Thanks, everyone.

Thank you.

Thank you very much. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.