Cholamandalam Financial Holdings Limited ($CHOLAHLDNG)

Ladies and gentlemen, good day, and welcome to the Cholamandalam Financial Holdings Q4 FY '26 Earnings Conference Call. Please note that this conference is being recorded. I now hand the conference over to Mr. Parth Jariwala from DAM Capital. Please go ahead.

Thank you. Good afternoon, everyone. Welcome to the Q4 FY '26 Earnings Call of Cholamandalam Financial Holdings Limited. From the management, we have Mr. Sridharan Rangarajan, Non-Executive Director, Cholamandalam Financial Holdings; Mr. N. Ganesh, Manager and CFO, Cholamandalam Financial Holdings; Mr. V. Suryanarayanan, Managing Director, Cholamandalam MS General Insurance; Mr. Rajive Kumaraswami, Managing Director Designate, Cholamandalam MS General Insurance; and Mr. Santosh Pandey, CFO, Cholamandalam MS General Insurance. I'll hand over the call to the management for the opening remarks, post which we can open the floor for Q&A. Over to you, sir.

So good afternoon to all of you, and welcome to our earnings call. I have our colleagues, I'm happy to introduce Rajive Kumaraswami, who is well known in the industry, who would take over from Suryanarayanan, who has done an exemplary job bringing Chola General Insurance to a creditable level, and he is also kind enough to address today's earnings call. And since you have got already covered very well Chola Finance side, this call will largely focus on the Chola General Insurance performance side. And then there will be an opening remark by Suri, and then later on, we'll open up for Q&A. Thank you.

Good afternoon. This is Suryanarayanan. Welcome to the earnings conference call. I'll now proceed with the overview of the performance of Chola MS for the quarter and year ended March '26. In line with the [indiscernible] and method of accounting and reporting of GDPI with respect to long-term nonmotor business, Chola MS recorded a GDP of INR 2,048 crores for Q4 and INR 7,762 crores for the year ended March. As you are aware, Chola MS suffered the loss of crop insurance business consequent to the retender impacted the quarter 4 GDPI by INR 124 crores and over INR 590 crores for the year. With the base effect of one by end reporting coming to an end as at the end of H1, the growth in non-crop business is visible from H2. Together with reinsurance inward business, the GWP for quarter 4 was INR 2,349 crores and INR 8,904 crores for the year. The premium received in advance on long-term non-motor products for the year was INR 410 crores with a market share of 3.3%. In motor, the principal line of business, the market share stood at 5.25%. Within motor, the company for the year had a composition of 49% plus in cars, 40% plus in CVs and about 10.5% in 2-wheelers. The company for the year secured about 24% of its total motor premium from new vehicles, which proportion was higher in cars, moderate in CVs and the lowest in 2-wheelers. The company has adopted a cautious stance with respect to growing the 2-wheeler book, particularly new vehicles in the context of absence of motor third-party premium increase over the last 4 years. The UOM for Chola MS for the full year stood at 30.46%, which measured without 1 by works out to 29.12%. As you are aware, FY '26 was the last year of the glide path. The company complied with the requirements on 1M basis. The company is amongst the top 3 players in terms of the operating expenses component of the claims ratio for Q4 and the year were at 81.3%, which is higher than the levels in the corresponding periods of the previous year. The motor OD claims ratio has risen for many players in the industry and has been rendered higher for Chola MS, reflecting the competitive intensity in the industry. Chola MS continues to be prudent and conservative in its provisioning for motor TP losses with the level of provisioning booked 10% higher than many of its peers. Recognizing the rising severity in court awards and third-party claims and the continued absence of increase in motor third-party premium, Chola stepped up its motor third-party reserving in the year. This has rendered the overall company claims ratio higher than the previous year by about 2.71%. Operationally, our proportion of compromised settlements in motor third-party claims continues to be robust. Consequently, the combined ratio for the year was at 115.2% and 112.2% without the effect. The combined ratio of 112 includes the impact of the motor third-party reserving augmentation. The investment corpus as at the end of the year was about INR 19,040 crores without the fair value change. The company had a mark-to-market gains of INR 137 crores in equity and a deficit of INR 112 crores in the debt portfolio as at the end of the year. You're aware the market gains position in equity were under lower due to the market meltdown from the geopolitical uncertainty position has reverted to a level of about INR 302 crores asset today. The PBT for the year was INR 454 crores after absorbing labor code-related gratuity provisioning and a small mark-to-market impairment provisioning on equity investments. The return on equity for the year on average net worth was at 10.4% and the 3-year average ROE picked at about 14.4%. The solvency ratio was at 1.96x. The Board of the company after a careful evaluation, I have decided that the company will seek forbearance for transitioning statutory accounting to Ind AS from April 1, 2027. This is to ensure a calibrated transition. It is fairly clear that there would be a significant drop in combined ratio in the year of adoption, but would level out over the years. As was mentioned by Mr. Sridharan, I'm happy to welcome Rajive, an industry veteran, who will be taking over from me effective June 1 in steering the company forward. My heartfelt thanks to all the analysts for their incisive queries and comments, which has kept our hearts on our toes in all our interactions. We'll now be happy to take any questions that you may have.

[Operator Instructions] Your first question comes from the line of Sanketh Godha from Avendus Spark.

The GDP -- sorry, the direct premium has declined in the current year. GWP growth is predominantly because of the reinsurance acceptance. Now given we are compliant, will the approach to the business going ahead will be a little different, whether the focus will be more on direct business? And if that is the case, which lines you will try to recover back a kind of market share to deliver growth in the next year? So that's my first question, sir.

Yes. So thanks, Sanketh. As I mentioned in the call, we were impacted by the loss of crop of about INR 598 crores for the year. And that was the last year of the tender. And as we are all aware, the Government of India's guidelines are expected any time and the next cycle of tender across the country will open up. Chola MS will be participating in the crop business across the states. And therefore, what was lost will definitely, we certainly hope to get it back in the crop side. And since we've had a good experience over the years on the direct side of crop business, we should be looking at even growing that piece of business.

And any other line of segment, like maybe you chose to slow down even motor segment a bit, especially the OD part. So any revisit to that business given naturally we are -- I mean obviously, that was the reason why I said even compliant, whether we'll be -- if crop come back and whether we will do the lines which were traditionally very strong in a way which we used to do in the past.

Clearly, see, the other aspect of the top line drop is also the conscious reduction in 2-wheeler. You would have seen the percentage drop over a period from 19.6%, we have just come down to about 10.6% -- and the quantum of 2-wheeler volume reduction was at least over INR 225 crores last year. So while that part of the 2-wheeler portion may moderate to an extent further, but you are not going to see the similar level of drop. And you will see that we have been growing in the car side steadily, continuously. And the commercial vehicle book is now is fairly stable at about 40% to 42% of the overall motor composition. So I think there, we will continue to grow. Our market share, it's not that we have lost in the motor. It's still at about 5.25% despite the drop and conscious drop in 2-wheelers. So that will continue to grow. And as a strategy, we -- our market share, if you have to look at the 2 segments of OD and TP, our market share in the OD has been growing up and TP has been moderated. In fact, we lost about 0.5% market share in PP and grew the motor OD market share to about 5.89%. So this is the tweak that is happening in the motor side. And we also have plans to grow the commercial space. We have secured a good level of reinsurance capacity during the year with favorable terms. Of course, the underlying pricing component in the commercial side is not something that we would have liked. But from our position, from our smaller market share position, there is certainly scope to grow and diversify our book on that front.

And sir, the second question is from an ROE perspective. See, when we chose to slow down our -- sorry, 2-wheeler business, our kind of leverage, which used to be plus -- 6.2 last year, it has dropped to 5.5%. On top of it, our combined also deteriorate, maybe there is a bit of conservatism there with respect to motor TP, but still it is higher compared to the last year. So if we -- I'm just asking, if we choose not to do 2-wheelers or not to scale up the 2-wheeler business leverage remaining lower, then heavy lifting of improvement in the ROE will be driven more by combined ratio improvement. So just wanted to understand from that perspective, if leverage remains at 5.5, honestly, your combined on the IGAAP basis, you should go to closer to maybe 108%, 109% to deliver 16%, 17%. So just want to understand that part of where the lever will come from in improvement in the core.

See, actually, if you look at it, the current year in terms of the claims ratio, I should admit has been bad for us. More in the OD side. See, TP is something what we are doing prudently there and that reserving. It's not that there is a loss in cash flow. It is still -- the cash is still with us. It's only an accounting provision that we have made. But the OD is where -- while it has risen, as I mentioned in the opening remarks for everyone ranging between 5% to 7% for us, the delta has been about 10%. So -- and that is an area of correction for us, which we have already commenced the necessary activities to bring down the loss ratio. Over a period of last 2 to 3 months, we have seen about 7% to 8% improvement in the price realization for us, which gives us the confidence that over the next 6 months, we should start seeing the reduction in the motor OD loss ratio. So that, given the proportion, I also talked about an increase in market share with respect to the OD side, that should help us in bringing the combined ratio back to a controllable level and to look at an ROE which is towards [indiscernible]

Okay. Okay. Understood, sir. And lastly, on long-term plans, just want to understand your strategy there incrementally, whether it will be a function of how AUM will change, then maybe it's spoken about how the new regulations will come. I just want to understand a bit of there given we were very typically strong player in the long-term plans.

See, in the long-term side, we continue to do the level of business that we were always doing, which is why you find that in the information deck that the premium received in advance position that we carry in the balance sheet in the non-motor side has only gone up. So I think as at March, we have something like about INR 570 crores or so is what we are carrying, which has moved up from INR 250 crores as at the previous March '25. So there, we continue to stay focused, notwithstanding the fact that we absorbed the costs upfront. And we do not see the long-term on reinsurance. So there is some value that is getting built into the balance sheet, which is real.

Understood, sir. And lastly, last one point, though we have taken fourth year in, if we officially [indiscernible] adopt officially IFRS, every player will do so. So whether there will be some -- a different approach to the reinsurance business or reinsurance [indiscernible] especially the retail line of businesses or long-term line of businesses. So that the benefit was typically every insurance company gets on reinsurance commissions involved with respect to the long-term plans might change in back accounting. So I just wanted to understand whether it will meaningfully change the reinsurance strategy, especially on the retail line side. I understand that the wholesale line, it's more of our trust management. But from a retail lines point of view, I just wanted to understand that, please.

So you should -- from the numbers you will understand that [indiscernible] is a company where retention levels are high. So our retail retention on a weighted basis would be somewhere at about 78 plus. Given the overall, including the blended commercial and retail is at about 72. So it is at about 78 plus. And even when IFRS comes with that coming in on both the commission and the reinsurance commission side. My belief is that it will really benefit. The net position will only be a benefit.

Your next question comes from the line of [indiscernible]

One question. As you rightly said next year, we will be moving towards IFRS. So if I take the current number of FY '26 on claims ratio as 81.2%, while going towards the IFRS, similar number, what will be the core similar number in IFRS accounting [indiscernible]

Yes, I can only broadly give you an overview. So you will find that at other dominant business the provisioning that we have on the multi TP side is fairly [indiscernible] and we will have a discounting element as you move into IFRS. That will bring in [indiscernible] of benefit back into the P&L. Santosh, if you want to explain more, you can.

While transitioning on the day 1, so entire liability, the present value will get calculated. On the day 1, there will be a big change in terms of the actual liability versus the future liability. So to that extent, it will be first opening will go to the net worth of the company. And later on, whatever the new liability gets added there the difference of the future value versus the present value will come to the P&L. So to that extent, the benefit to the P&L will come. .

If you can -- so you have guided for the ROE of around 15%, right? Our target is to achieve it. So can you say that next year, it is possible to achieve that ROE of 15% being beneficial, which we are getting from an IFRS point of view?

Yes. Just to clarify, we will be transitioning to IFRS from April '27. [indiscernible] So we are not [indiscernible] I thought I'd make that clear.

Okay. So it's in FY '28, right? .

Yes.

That was our confusion. And sir, on the expense ratio, what is -- as you rightly said, we have achieved the target by this. How one should see this ratio going forward, it will remain stable? Or we should see a decline in this month? How one should see this point?

The way one should look at it is even for a moment, assuming that the regulator doesn't bring in any change in the regulations from now? The 30% would be the norm. And there is no further glide path. The glide part came to an end with '25,'26. Therefore, all players will have to necessarily come will have to comply to this level, certainly. What this thing has helped us over the last 3 years is to do significant bill tightening, which has helped us reduce our OpEx proportion quite significantly. So I did say earlier in the opening remarks that we are amongst the top 3 in terms of the percentage at that level. I don't see any reason why that advantage will get frittered away in the next year or in the coming years. So that part of the efficiency that has been brought in is for real and for the future strength. Of course, on balance portion, which is the larger portion is certainly on the commission that we pay out to the intermediation. There, we will certainly look forward to what the regulator is going to bring about in the expected change. And we can only say that any reduction that the regulator mandates can only benefit us from here on.

Next question comes from the line of [indiscernible]

I have one question on our solvency ratios. This year, it's on 1.96 earlier versus the historical level of around -- in the range of 2 to 2.15. So how should we read this? And what would be -- or how should we read this? And how will we improve levels going forward?

Big solvency computation is a function of the premium growth as well as the claims growth. So this year, you would have seen that the claims growth is higher. From in terms of a claims ratio, therefore, it has pulled in more capital. We're bringing the solvency level down from 2.8 to 1.96 as we discussed earlier. So with the improvement in the claims ratio, it should again move back. Still, the company is profitable and it is adding. Shareholders have been considered not to take a dividend so the money is getting flowed back into the business to support growth and solvency levels. It can only move up from that level.

And if you could provide more color on the motor business with respect to the renewable and press business and how it performed in FY '26 and what is our strategy for the upcoming year?

I think moving to the Page 53, it is the motor teams. So in the big picture, if you look at the motor is that we continue to have that -- we've been fairly steady in terms of the market share. and being amongst the top 5 private sector players in the motor business. And you will find that the car is something that which has been going up. From 35, 39, 42 and 49. So that's a kind of proportion mix, which is being there. We will continue to stay focused on cars. And over the years, we have also seen the growth in agency coming up. So now that a good base has been built up in the agency, the focus will now be on pushing up the renewal rate. More importantly, we are also as a key strategic initiative. Very soon, we should be launching Chola [indiscernible], an operating app for our sales personnel and channel partners. This app will help us build a very structured partner engagement and also do good performance management of not just our staff, but also the productivity levels across agents simplifying the transaction, we feel that this app will put us on par with the new age companies in terms of the digital offerings that we can give to our channel partners. So I think that should also give us [indiscernible] to our renewal ratios. We know that efficiency in operations and operating digitally certainly gives a leg up in terms of renewals. We certainly hope to in cash on that as well.

More the underwriting business is on underwriting, but any strategy way ahead to reduce underwriting losses?

Think it's obvious that the industry has seen the motor combined ratio levels in Chuck. It's a combination of the competitive intensity, the kind of pressures that are there the motor mode side and the absence of any TP price revision coming into the market for almost 4 to 5 years, even though the inflation level both in terms of minimum wages as well as the medical inflation is been there under is real. We are seeing a minimum wage increase, which is there. And we are also likely to see central minimum wage prescription by the government in the near future. So these can have an inflationary effect on the motor TP loss levels for the industry as such. And while -- the industry has been clamoring for a 2-way correction in the motor third-party pricing. One, rationalization reduction were required an increase were required. We've not been getting it though. I think multiple representations at company level, at industry level, has that happened both to the regulator as well as the ministry. I think that is something which we honestly look forward. And we are prudent in terms of our reserving recognizing this. And as I mentioned in the opening remarks, operationally, we continue to be efficient in terms of our own compromise settle ones are in tracking and monitoring, taking the severity inflation levels fairly to lower levels.

Do you think the motor portfolio requires pricing restructure to improve our underwriting performance?

Yes. Again, as I mentioned in the last 2 to 3 months, on the motor OD side, we have affected a pricing correction we are seeing somewhere about 7% to 8% improved pricing on the [indiscernible], which should help us going forward in bringing down the Motorolas ratios. [indiscernible] of course, it's a government decision. We would only wait and continue to pursue here with both the regulator and the government in trying to achieve this.

The next question comes from the line of [indiscernible]

Yes. Sir, just one question. Guidance on combined ratio would help.

So Ritika, sorry. This is [indiscernible] here. So I think as Surya had mentioned, we are on the commercial side of the business, seeing some amount of pricing pressure. So while it is more about managing line sizes at this point in time on the commercial business and increasing spread. I think from an overall group perspective, we typically don't give guidance from a forward-looking perspective. But as I think the team has mentioned that the intent would be from a medium to long-term perspective, maintain the 15% plus ROE guidance. So whatever it takes, whether it is managing float income or combined ratio, we will work towards getting to that objective. And things will need to evolve once we get a little more clarity on what the regulator does on because if there is a reduction on the intermediation costs, what could potentially happen is that premiums may come down and which may reduce the float so we'll have to navigate things. So I would not want to venture into giving any guidance on what we would do on combined. But yes, we will endeavor to remain at the 15% plus ROE levels.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Yes. Thank you all. And I'd like to whole heartily thank Suri for handing over a very solidly build foundation and I endeavor to not only protect but to build further on that franchise and look forward to interacting with many of you in person and looking forward more incisive questions and your guidance on how we can make our disclosures letter. Thank you once again.

Thank you. On behalf of Cholamandalam Financial Holdings, that concludes this conference call. Thank you, everyone, for joining us, and you may now disconnect your lines.