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

Ladies and gentlemen, good day, and welcome to Cholamandalam Financial Holdings Limited Q3 FY '25 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note, this conference call is being recorded. I now hand the conference over to Mr. Parth Jariwala from DAM Capital Advisors. Thank you, and over to you.

Good evening all, and welcome to Q3 FY '25 Earnings Call of Cholamandalam Financial Holdings Limited. From the management, we have Mr. Sridharan Rangarajan, Non-Executive Director, Cholamandalam Financial Holdings; Mr. N. Ganesh, Chief Financial Officer, Cholamandalam Financial Holdings; Mr. V. Suryanarayanan, Managing Director, Cholamandalam MS General Insurance; and Mr. S. Venugopalan, Chief Financial Officer, Cholamandalam MS General Insurance. Without further ado, I hand over the call to the management for their opening remarks, post which we can open the floor for question and answers. Over to you, sir.

Good evening to all of you, and thanks for your participation. We have our Managing Director, Suryanarayanan, and also our CFO, Venugopalan. We would request Suryanarayanan to make the opening remarks, and we will then open up for Q&A.

Thanks, Sridharan. Good evening to each one of you. Let me proceed with giving an overview of the performance of Chola MS for the quarter and 9 months ended December 2024. In Q3, in line with the regulatory requirements, the industry implemented the 1/n method of accounting and reporting of GWP with respect to long-term non-motor business. As all of you are aware, the motor business long term has been dealt with in a particular way since 2018 when it was introduced. Now with this changed method of recognizing GWP, Chola MS recorded a gross direct premium of INR 2,003 crores, with a growth rate of 8% as against the multiline insurer's growth of 7.2%, and we followed the method that was adopted until September '24. The additional GDPI recognition would have been INR 124 crores, which amount is now reflected as premium received in advance. As at the end of 9 months, the GDPI was INR 6,095 crores with a growth rate of about 10.3% as against the multiline growth -- multiline insurer's growth of 6.8%. In quarter 3, the company grew higher than industry in motor. As a result of the aforementioned 1/n method in reporting, the growth in the fire, which means more the drilling business and the health line of business was lower. As of December YTD, the composition of motor in the overall premium has reduced to about 64% as against 65.9% in the previous financial year. In motor, the principal line of business for Chola MS, the market share grew to about 5.5%. Within motor, now the company has a composition of 41.2% in cars, 42.9% in CVs and 15.8% in 2-wheelers. The company gets about 28% of its total motor premium from new vehicles. In the current quarter, the company entered 2 large OEM car programs and business has commenced in these programs. The EOM for Chola MS in Q3 was rendered higher because of the 1/n method change on product mix changes. The company stays committed to stick to the glide path approved by the Board and presented to the regulator. In the 9 months ended December, the company expended INR 92 crores towards technology spend as against INR 70 crores in the corresponding period, which also had marginal influence on the EOM ratio. The claims ratio for the quarter was at 72.6% as against 74.5% in the corresponding quarter, lower by about 1.9%. The NATCAT event from single cyclone in Pondicherry impacted the company during the quarter. The combined effect of NATCAT events on the claims ratio for the 9 months ended December is about 0.7%. The company continues to be prudent in its reserving for motor third-party claims. The combined ratio for the quarter was 111.7%. If one were to look at it without the 1/n effect, it was 108.9% and compares well with 110.3% of corresponding quarter. Likewise, the YTDC combined ratio without 1/n effect was 109.4% as against 110.4% in corresponding period. The company's investment corpus as of December grew to INR 17,640 crores with an investment income of INR 332 crores for the quarter. The profit before tax in the quarter and 9 months ended December were at INR 137 crores and INR 486 crores, respectively. The return on equity as at December progressed to 13.6%, not annualized. The company operates with a solvency of 2.14x. We'll now be happy to take any questions that you may have.

[Operator Instructions] We'll take our first question from the line of Sanketh Godha from Avendus Spark.

Sir, in the current quarter, we are seeing a little better growth compared to what we delivered in first half. So is this growth largely driven because of you believing the competitiveness has improved in Motor segment, and that's why you see the better opportunity to grow that particular segment? Or to some extent 1/n drove to go a little aggressive, a little on the Motor, so that overall growth doesn't get impacted. I just wanted to understand, was there any material change in the underlying market to drive the growth in the motor business? That's my first question, sir.

Thanks, Sanketh. See, this quarter also, as you will know, represents the festive season business, particularly we found the car sales were a little more bullish in this quarter. So, I have talked about the new vehicle business, some during the quarter. So all these have helped. Besides, we have also been seeing an uptick in our agency business, particularly Motor, which has also helped in the growth in Motor. On the trust that the company has been having in having a higher proportion of cars, you would see it in the charts, in Page 57, so -- where over a period of time, so we were at 25.4% in FY '21, and it has progressively improved to now about 41.2% in cars. So that's the portfolio composition swing that the company has been bringing about over the last 4 years or so, and it's moving in the same direction. This is contributing to the growth in Motor.

Okay. So sir, is it fair to assume that, sir, that in third quarter predominantly a little higher exposure to cars has played a role to see better growth? And if I'm right, then the growth was morely reflected in OD because cars predominately have OD benefit there?

Yes, you could say that the composition of OD in this entire business has been rising continuously.

Got it, sir. And the second question, sir, was on health loss ratios for the quarter. See, we were -- honestly, we had some historical past, our health loss ratios have deteriorated. And now at 75.5% Health and PA put together, it seems to be much, much higher compared to what we were reporting around 69-ish for the last 3, 4 quarters. So anything to read because third quarter is typically a healthy quarter for the country as a whole. Still the loss ratio has deteriorated, any color to understand and any corrective measures to be taken there?

See, the company has been stepping up its employer-employee group health business this year, though at a number of about INR 320 crores for 9 months ended. Chola MS would still be amongst the bottom 5 in terms of the employer-employee. But from our past, it has grown, and this probably reflects the loss ratio that are more closer to that segment of business. And then moving on to actually the retail side of the health business, some of our products, we had a price increase in one of the products coming in from October. And in one of the products, we have -- revision is coming in from January 2025, which should also help in reducing the loss ratios as we move along.

Should we expect that it to go to below 70s kind of a number going ahead, sir?

No, given the employer-employee group health, so we would -- one can reasonably expect it to be around the, say, around 72% or so, but I don't see that going -- go back to about 65% or 66%. [indiscernible] The weight of the employer-employee would be there.

Got it, sir. And one more question was, we were under the impression, sir, that the 1/n accounting should impact combined, but it should not have any impact on profits because we were recognizing premium on 1/365 basis. But just from an accounting point of view, the profit seems to be different for third quarter, INR 102 crores versus INR 111 crores. So what explains that difference, sir? What led to that -- INR 8 crores, INR 9 crores of extra profit in -- if we would have followed 1/n accounting -- if we would have not followed 1/n by accounting?

No, the third quarter, you are right that the net earned premium will not have any impact due to 1/n because the pro-rata premium is being the same between the old and new. But there is a smaller amount of impact that it creates from the point of view of the RI commission. That is also there. There are impacts rising out of the commission direct is also there, but in a smaller way. So overall, the profitability for the company is not impacted rather than the direct commission in a smaller way and RI commission to some extent. So this has impacted the PBT slightly negatively. But overall, the profitability all depends on the loss ratios, which are in the normal course as a going part of it even in Q3 to us. There's not much of a difference. INR 7 crore, INR 8 crores difference in the Q3 may not be a material part.

Okay. Understood, sir. So basically, the biggest portion was the divergence largely because of RI commission. That's the simple way I need to understand, right, sir?

Yes.

Okay. Okay. Perfect. And last one from my side. 1/n accounting naturally will impact industry's EOM. So do you expect a regulator to give a leeway because the denominator itself got changed and therefore, do you expect a leeway to come on EOM compliance by some -- maybe by a year or so? And the second thing is that if it doesn't come, then in these long-term plans, is it possible to defer the commissions so that you become -- industry becomes EOM compliant. Because when we speak to other players in the industry, the answer seems to be a mixed bag because some people are able to defer it, some people did not defer it. So just wanted to understand how it is expected to play out given we have a decent exposure to these long-term plans?

Sanketh, the industry has been continuously representing to the regulator with respect to the diminished denominator while computing the EOM levels, which is what you are explaining. So they have taken this explanation. And the industry hopes that for in subsequent years, it will probably help in some guidance, which could actually help the industry. So that is on the first part. The second part with respect to the commission payouts to various channels. Some channels, it's been possible to ensure that the payment of commission happens on an annual basis. And naturally, as intermediaries, the channels have their own interest in terms of their own requirements, in terms of their own reporting requirements, financial requirements. So it's a mixed bag is how we would tend to see it at this point in time. From a company's point of view, if there are certain high-cost channels, at this point in time, our high cost products, however, profitable they may be, we may need to take a more cautious call keeping the EOM compliance in mind.

Got it. So just a follow-up on that point. Assume regulator doesn't relax the EOM, then your strategy to long-term products might change from current approach so that you become -- or industry players become more EOM compliant?

It's more -- an opportunity that is there. These are, by and large, economically profitable businesses. And therefore, I think -- so to the extent that there is leeway, I'm sure companies and market competitors will continue to take the long-term business.

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

Thanks, everyone, for making it to this conference call. The company has been growing well ahead of the industry and sticking to its core objectives. We expect to continue to do well over the ensuing quarters. Thanks.

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