Ladies and gentlemen, good day and welcome to the Q2 FY 2025 earnings Conference call of Cholamandalam Financial Holdings, hosted by DAM Capital Advisors. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on a touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Parth Jariwala from DAM Capital Advisors. Thank you, and over to you, sir.
Thank you. Good evening, all. Welcome to Q2 FY 2025 earnings call of Cholamandalam Financial Holdings Limited. From the management, we have Mr. Sridharan Rangarajan, Non-Executive Director, Cholamandalam Financial Holdings Limited. Mr. N. Ganesh, Manager and Chief Financial Officer, Cholamandalam Financial Holdings Limited. Mr. V. Suryanarayanan, Managing Director, Cholamandalam MS General Insurance Company Limited. Mr. S. Venugopalan, Chief Financial Officer, Cholamandalam MS General Insurance Company Limited. I'll now hand over the call to management for their opening remarks and after which we can open the floor for questions and answers. Over to you, sir.
Good afternoon to all of you, and thanks for participating in our call. I would request Mr. Suryanarayanan, MD of Cholamandalam Financial Holdings. NBFC business is well covered, and you have seen already the presentation. You would have attended the call. I would request Suri to talk about that.
Thanks, Sridharan. Good evening to all of you who have joined this conference call of Cholamandalam Financial Holdings. I shall now proceed to give an overview of the performance of Cholamandalam Financial Holdings both for the quarter and the half-year. In Q2, Cholamandalam Financial Holdings recorded a gross direct premium of INR 2,171 crores with a growth rate of 9.2%, as against the multi-line insurers' growth of 1.7%. As at the half-year, the top line was at INR 4,092 crores with a growth rate of 11.5%, as against the multi-line insurers' growth at 6.7%. In this quarter, the company grew higher than industry in motor, fire, and miscellaneous lines of business. In group health, the company grew its volume to INR 233 crores for the half-year, which volume still is one of the lowest amongst multi-line players.
As at the half-year, the composition of motor has reduced to 59% from 62% in the corresponding period. In motor, which is the principal line of business, the growth in the quarter was at 10.6%, as against industry growth of 6.2%. The company presently has a composition of 40% in cars, 43.8% in commercial vehicles, and 16% in two-wheelers, and the company gets about 29% of its total motor premium from new vehicles. During the quarter, the company added a few large NBFC partners. Moving on to the expenses of management, the percentage for Q2 was 32.18%, as against 29.7% in the corresponding quarter. As at the half-year, it was at 32.73%, as against the previous full year of 32.71%, which means more or less flat as compared to the previous full year.
In the half-year, the company has expended INR 56 crores towards technology spend, as against INR 37 crores in corresponding half-year. This expend has also contributed to the higher EOM. The claims ratio was at 72.6%, as against 73.8%, lower by about 1.2%. This quarter, we had the NATCAT events by way of flood and inundation in Andhra, Telangana, and Surat, which impacted the company for an amount which was very similar to the impact that the company had the corresponding quarter of previous year. The company continues to be prudent in its reserving for motor third-party claims. Cholamandalam Financial Holdings' investment portfolio corpus, as at September, was at INR 17,189 crores, and we had an investment income of INR 342 crores for the quarter. The PBT in the quarter and half-year were at INR 171 and INR 350 crores. This included a non-recurring income of INR 22.68 crores by way of interest on income tax refund.
Return on equity for the half-year progressed to 10%, not annualized. The solvency was at 2.06 times. The company has been progressing on several digital initiatives. We had the migration of the private car portfolio from the legacy ERP systems to a cloud architecture with the contemporary configuration capabilities and microservices-based APIs. The company will be embarking on the next phase of migration in this quarter. We'll now be happy to take any questions that you may have.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touch-tone telephone. If you wish to remove yourself from question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we'll wait for a moment while the question queue assembles. The first question is from the line of Atul Mehra from Motilal Oswal. Please go ahead.
Yeah, hi sir. Good evening and thanks for the opportunity. I've asked this question before in the earlier calls. Just wanted to check again on what is the path towards more value realization for shareholders of Cholamandalam Financial Holdings because I think in the number of conversations we have had in the past, we've discussed this particular matter. So if you could update on what the board is thinking about this and as shareholders, what should we expect? Thank you, sir.
Sir, thank you for your persistently asking this question. I think we have fully communicated, the board has not considered this aspect, but definitely it would take an appropriate call at an appropriate time. So at this point in time, no such discussion has happened.
Right. Sir, can we have any communication from the board with this particular matter because obviously a shareholder, this is of most importance to us? So can we expect or can you, through this conversation, table this as a matter of discussion so that we have more clarity on this aspect?
I think definitely the board is seized of what is happening, what is the development in the market, and definitely it would take an appropriate call at a time which is suitable and it feels comfortable, so I think that's what we could communicate to you at this time.
Sure. Thank you very much. Thank you.
Thank you.
Thank you. A reminder to all participants, you may press star and one to ask question. The next question is from the line of Sanketh Godha from Avendus Spark. Please go ahead.
Yeah, thank you for the opportunity. Sir, when I look at year on year, our loss ratio has improved except for catastrophe events also by 130 basis points. But somehow our OpEx ratio, which was 36.3% last year, has increased to 37.4%, and that has been a bit of drag on commensurate improvement in the combined ratio. So just wanted to understand going forward, how do we see this OpEx ratio to play out given EOM is around and the combined trajectory to play out? That's on overall cost. And the second question is predominantly on motor. We see that most of the lines have seen a bit of improvement in the loss ratios, maybe if I exclude the CAT event. But motor OD still seems to be a little higher compared to what historical comfort we used to give.
Can I attribute this largely because our two-wheeler component has gone up and the 74-point kind of four-wheeler loss ratio is the new normal if we continue to maintain the current product mix going there? So these are my two questions to start with.
Thanks, Sanketh. You are talking of 37%, which is not the EOM, which is the COR component, which is net of the reinsurance commission. The sourcing cost minus that is what you are talking of. Let me tell you that our reinsurance commission recognition is fairly conservative, and we wait for the events to pan out before recognizing the full eligible reinsurance commission, which therefore can be better if there are no more NATCAT events that come through. So that is one element which can improve the combined ratio going forward. On the cost itself, I did mention in my opening remarks that we have had some tech spend, which component will probably continue for H2 as well and probably H1 of next year.
This legacy system transformation plus whatever we are doing as part of our other multiple tech transformation programs will have this cost element, but I think we should look at it more from a future perspective, and in any case, these expenditures will also qualify for the additional allowance that the regulator has spelled out for the insurtech and other related spend. On the pure OpEx structure, we compare favorably with most other competition, so that would be my view on the cost structure. Moving on to your second question relating to the motor OD LR, if one were to just look at that page 54, which shows the trend of the motor OD LAR over the period, and of course, this quarter, we have had a higher motor OD LR as compared to the past.
Our mix is also, you would notice that has a higher component of commercial vehicles. And in commercial vehicles, we are present across the spectrum, both the small, intermediate, and heavy commercial vehicles. And to that extent, our motor OD loss ratios will be different as compared to certain other players. But what you will see is that over a period, so this is more or less stable. And generally, we have also seen that the loss ratios in H2 is always lower than H1 for multiple reasons, and we are likely to see that trend as well. So you mentioned about two-wheelers. Two-wheelers, it's not a worry more on the OD side. Two-wheelers will be a worry more on the motor third-party side, particularly with the long-term in perspective and without the pricing correction.
Companies would be hesitant to lock themselves in for the longer term at the current prices, even though we know that inflation will creep in by the time you reach the fourth or fifth year, both in terms of minimum wages as well as the medical inflation that will come.
Got it, sir. Sir, with the 101 combined almost for first half, you delivered almost annualized 20% ROE. So just asking, given that the trajectory will be better in the second half, and I'm believing you might be maybe afraid to say that your combined ratio in FY 2026 or FY 2027 will be much better than what it is today. So is it fair that this 10% ROE for the half or annualized 20% ROE is now here to stay, or you see this number can be a bit of I know there is a bit of one-off with respect to income tax reversal and all those things, but even that 18%-19% ROE still we believe is achievable, sir?
Yeah, you rightly called out the one time which would have given some basis points to this 10% non-annualized. But if you look at the trend over the quarters, you will find that things have only been improving, and I don't see any reason why this cannot be sustained.
Perfect, sir. And lastly, maybe just on these long-term policies, which now has to be recognized on one-by-one basis, just if you can tell what is the exposure right now as on 1st August FY 2025. And given it's a very profitable book for us, how do you try to overcome the challenge with respect to this particular business going ahead, given you compete with multiple players in open architecture bancassurance channels, and maybe indirectly you might be even competing with life insurers in this particular product? So just want to understand your strategy, how you will going ahead conduct the business.
Yeah, good question. So this matter, of course, is being still pursued by the industry with the regulator, though of course the regulator has made it mandatory that the change will be effective from October. Nevertheless, the industry is still pursuing. What this does is that it's the accounting recognition that is changing from a top-line perspective. But from a cash flow perspective, the money will still come to the insurers. It is going to reflect in the investment corpus, and therefore the investment income stream of things is not going to change in any way. The critical area of change is only going to be as to whether the cost will be paid upfront or whether it will be paid in the respective years. So that is the dialogue that all insurers will be having, are having, and will be having with their respective industry partners.
The dust has to settle down on that. Where the shape and direction it ultimately takes is what will determine as to how things change. But purely if on the investment income side, there is no change. If the companies are to pay upfront, which on the face of it looks like that is not permitted by the regulations, then you would have a lower reported top line and the cost being measured against that top line, which will mean that the expense of management will look bulged.
Right. But sir, given this is one-by-one kind of a transition, then is it a fair assumption that if a regulator doesn't give any leeway on recognizing from one-by-one, then maybe you can expect a leeway on EOM compliance by, say, another year or so because anyhow the business will start flowing in, and then there will be no incremental expenditure for the one which is booked already. Assuming you end up, this industry ends up with a practice of paying upfront, then is it fair to say that some bit of leeway is expected to come from regulator on EOM?
What you are asking, I fully understand, but I don't know if I could make a guess on behalf of the regulator. I can't speak for the regulator. I'm sure as an industry and as council, we will continue to represent with the regulator for looking at it in its context and the rightness of things.
Got it, sir. Perfect. That's it from my side. Thank you very much for the answer.
Thank you. A reminder to all participants, you may press star and one to ask question. Is there no further questions from the participants? I would now like to hand the conference over to the management for closing comments. Over to you, sir.
Thanks everyone for attending the conference. The company is on a forward momentum, and we will continue to keep growing well and be profitable. Thank you.
Thank you. On behalf of DAM Capital Advisors, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.