Cholamandalam Financial Holdings Ltd. share price target

Tube Investments Sets Record Date for Demerger: Tube Investments of India (Tube Invest) has set August 28, 2017 as the record date, to give effect to scheme of arrangement approved by National Company Law Tribunal (NCLT). As per the scheme, all manufacturing entities and investments inmanufacturing subsidiaries & joint ventures shall be organised under Tube Investments of India Ltd (TIIL) and all financial services businesses and investments related to financial services shall be organised as TI Financial Holdings Ltd (TIFHL).

FY17 saw Tube Investments' (TI) PAT double to Rs 2 bn, mainly due to interest savings.We expect 23% PAT CAGR (to Rs 3 bn) over FY17-19 as operating leverage kicks in.

TI added capacities in bicycles, engineering (tubes) and metal formed (chains) segments during downturn; we believe, as macro revives, these capacities will start paying off. We remain confident about prospects of manufacturing business as (1) margin improves in cycle division led by higher volumes ..

Discretionary Product Volumes Impacted by Demonetisation;Recovery Underway:Business momentum that was building up until demonetisation slowed downconsiderably as discretionary spending dependent product sales witnessed two-order impact; direct impact was seen in cycles and after-market segment apartsecond order impact by way of lower off-take by automotive sector.

Q1FY17 Results of Tube contains more of positives; maintain BUY: Tube Investments of India (Tube) revenue, EBITDA and PAT grow to Rs.10,979Mn,Rs.573Mn and Rs.424Mn respectively during Q1FY17 which are higher by 6.4%,37.6% and 135.4% respectively on YoY basis.We revise our standalone revenue, EBITDA and PAT to Rs.42,077Mn, Rs.3,780Mn and Rs.1,542Mn respectively for FY17E; and for FY18E, the same is revised toRs.46,652Mn, Rs.4,404, and Rs.1,921Mn respectively.We expect cycles segment to grow to Rs.1,554Mn and Rs.1,637Mn for FY17E and FY18E respectively which is a 5% CAGR growth during FY16-18E. The estimateincorporates 2.3% of volumes sustained by institutional business and 2.6% ofrealisation growth largely from speciality cycles.

We revise our revenue & EBITDA estimates for FY16E and FY17E to Rs. 37,148mn & Rs.3,464mn and Rs.39,299mn & Rs.3,835mn respectively and also introducing FY18E estimates. Our revenue and EBITDA estimates are conservative against Bloomberg consensus estimates for FY17E and FY18E. We believe that recovery in the Engineering and Metal products business to remain moderate for FY17E, whereas the growth factored in the consensus seems contingent to multiple factors.

The announcement of 14% stake sale in Cholamandalam MS General InsuranceCo. Ltd. to its JV partner Mitsui Sumitomo Insurance co. Ltd. at Rs.211 per sharevaluing Chola MS at Rs.63,408mn, which is 8.46x of book value as on September2015 balance sheet.

Cycles to negate cyclicality of other segments: We expect the cycles & components segment to grow at a CAGR of 12.4% with volumes and realisation growing at CAGR of 3.5% and 8.9% during FY15-17E. We consider licensing between TI and Ridley to be beneficial in the premium and super premium categories. We expect speciality segment to remain as the fastest growing at a CAGR of 19.7%, while with support from institutional buying; standard segment is expected to grow above industry growth rate of 3.7% during FY15-17E.

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