Cholamandalam and DBS deal

Cholamandalam Investment and Finance Co. Ltd. (CIFCO) has done a great deal from the shareholders point of view. They had brought in DBS as a partner by issuing fresh shares to them at Rs. 140 a share. Now DBS has exited at Rs. 90 per share. It looks unfair on DBS but the relationship was going nowhere.

At the time of exit of DBS here is a statement from the Murugappa group:

Mr. A Vellayan, Executive Chairman, Murugappa Group said “The acquisition of stake and the investment made by the Group signifies our firm intentions and focus for the NBFC business. We will grow this business aggressively exploiting the vast opportunity and leveraging on our established relationships with Dealers, OEMs, solid customer base and the Group’s large presence in the agri business”.

Mr. M A Alagappan, Chairman, Chola DBS said “Chola is a strong brand and has been a household name for three decades. This consolidation is a great opportunity for the Group to aggressively grow and re-establish Cholamandalam as a premier NBFC in the Asset financing and wealth management space”.

This sounds good, but the ‘wealth management space’ sounds hollow. CIFCO does not inspire much confidence in wealth management – except of course for the shareholders of EID Parry, Carborundum Universal, Tube Investment, Coromandel International, etc.

To me the upside in this share is quite limited. They need to reduce their cost of finance substantially to compete with the banks, in housing finance compete with Indiainfoline, India bulls, etc. Chola in a competitive market? well..seems difficult.

If you are a shareholder get ready for a steady 12-15% growth in the share price, about 5% dividend yield on the share (starting 2012), ..not bad. As a shareholder I am reasonably happy (having sold at 230-40 to pay for the rights at 140)…..but ‘substantial aggressive growth’….I doubt.

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