Ladies and gentlemen, good day, and welcome to Cholamandalam Financial Holdings Q4 and FY 2024 earnings conference call, hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in 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 your touchtone 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.
Good morning, everyone, and welcome to Q4 FY 2024 earnings call of Cholamandalam Financial Holdings Limited. From the management side, we have Mr. Sridharan Rangarajan, Non-Executive Director, Cholamandalam Financial Holdings Limited, Mr. N. Ganesh, Manager and Chief Financial Officer of Cholamandalam Financial Holdings, Mr. V. Suryanarayanan, Managing Director, Cholamandalam MS General Insurance, Mr. S. Venugopalan, Chief Financial Officer, Cholamandalam MS General Insurance. I now hand over the call to management to discuss the FY 2024 earnings call and give their. After which we can open for question and answer.
Right.
Over to you, sir.
Sure. Thank you. Good morning, and hope all of you are doing well and your family is in good health. I have pleasure to talk to you in the Q4 earnings call. Both the companies, Chola MS, as well as Cholamandalam Finance, have done exceedingly well. Today I have with me Mr. Suryanarayanan, MD of Chola MS General Insurance, and Mr. Venugopalan, CFO for Chola MS General Insurance, and our CFO, Mr. Ganesh. So since there's a wide coverage as far as Cholamandalam Investment and Finance Company, you have already attended the calls as well. We will clearly focus this call to Chola MS General Insurance, and I request Suryanarayanan to give you the opening commentary about the business, and then we'll open up for a Q&A. Thank you.
Thank you, Sridhar. Good morning to all of you for joining the call, and I shall now proceed to give an overview of performance of Chola MS General for the quarter and the year. In quarter four, Chola MS recorded a gross direct premium of INR 2,007 crore, with a growth rate of 13.6% as against the multi-line insurers' growth of 10.9%. The full year premium was at INR 7,533 crore, which is a growth rate of 22.4% as against the multi-line insurers' growth of 14.2%. The company has grown across all its channels. For the quarter ended March, in its captive channels, business from the sister company and the Insurance Express outlets, GWP grew by about 21.5%, apart from growth in other channels.
In the financial year, Chola MS recorded a crop insurance premium of INR 465 crore, which constitutes about 6.2% of the top line, with growth in commercial and health lines. The composition of motor in the overall premium has reduced to 65.9% from 70.6% in the previous year. In motor insurance, with a gross premium of INR 4,964 crore for the year, Chola MS is getting stronger in the private car segments across both new and used vehicles. The company underwrote over 100,000 electric vehicles in the year across categories. The company, excluding crop, has 26.5% of its premium from rural markets.
The expense of management for Chola MS for the year was at 32.64%, as against 35.79% in the previous year, a reduction of 3.15%. The claims ratio for the year was 73.7%, against 71.2% in the previous year. The impact of the natural catastrophic events for the year, in value terms, was about INR 55 crore, which rendered the overall claims ratio higher by 1.08%. Besides, the NatCat claims also impacted the reinsurance commission earnings. The company continues to be prudent in its reserving for motor third-party claims. The combined ratio for the year was at 109.9, which includes the impact of 1.08 by way of NatCat claims.
The investment portfolio corpus at the end of the year was at INR 16,501 crore, with an investment income of INR 1,116 crore. With no exposure to stressed assets, recoveries from the fully provided exposures in Reliance Capital, IL&FS would be recognized on cash basis as and when it happens. The profit before tax in quarter four was INR 91 crore, and for the full year was at INR 444 crore, as against INR 264 crore in the corresponding period. The return on equity for the year progressed to 14.25% as against 9.64% in the previous year. The company, during the quarter, was acknowledged as the best mid-sized non-life insurer by Mint Publication. 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 touchtone telephone. If you wish to remove yourself from question queue, you may press star and two. Participants are requested to use handset while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Atul Mehra from Motilal Oswal Asset Management. Please go ahead.
Hi, good morning, and thanks for the opportunity. Sir, recently there was this study discussion paper around investment holding companies, where we are talking about the proposed call option mechanism for more appropriate price discovery. So is the board of the-
Sorry, you are not audible, sir. Could you please-
Yeah, I'll just repeat.
Clearly. Yeah.
That's better.
That's better now, yeah.
Yeah. So basically, I was saying that recently there was a study discussion paper around investment holding companies for better price discovery of investment holding companies. They are proposing a call option mechanism and so on and so forth. So I just want to check, is the board or the management doing anything in terms of to make sure that there is better in terms of underlying value created for the entity, which is Cholamandalam Financial Holdings, and there is better price discovery that is coming about. So any comments or anything that you can talk about, even on behalf of the board or the management?
Sorry, honestly, your line is not that audible, but I think I guessed your question and probably answer. In case this is not, then please let me know. So as Shriram Financial Holdings, probably you are looking at an option for it, the underlying subsidiary to be listed or potential value creation is probably the underlying question that you're looking for. Is that correct?
Yes, sir.
Right.
Yes.
I think we have. Sorry. We have been telling all the while is that we feel that at an appropriate time either when the statute forces us or at an appropriate time we will be more than happy to look at this. But for the capital required for the, you know, the insurance business, both the partners are committed to provide and we continue to support that initiative. That is a position that we are holding from the beginning, and we will continue to hold this.
Right. And is there any timeline to it, sir?
No timeline as such.
All right. Okay. Thank you so much.
Thank you. Next question is from the line of Sanket Godha from Avendus Spark. Please go ahead.
Yeah. Thank you. Thank you for the opportunity. Sir, I just want to understand your growth strategy for next year. You know, so for the current year, we did crop INR 470 odd crore, but we naturally slowed down a bit on crop and motor in the current year, especially in the second half of the year. So, just wanted to know how you will look at growth next year, which line segments you will grow, whether we can see a growth in crop to grow better than INR 470 crore, what you have done in the current year.
Any revisiting of your strategy with respect to commercial loans, especially fire marine, given we are largely limited to our JV partner exposures there, nothing other than the banker relationships. So just wanted to understand what is your growth aspiration next year, and which products will drive the growth, especially motor crop and commercial loans? That's my first question, sir.
Thanks, Sanket. All of you are perhaps aware that the last two years, Chola Insurance has been growing faster than the industry.
Mm-hmm.
27.2% in 2022, 2023, and now 22.4% in 2023, 2024. So the company is committed to growing higher than the industry growth, multi-line players growth for 2024, 2025 as well.
Mm.
And then, yeah, so to talk about crop, last year marked our re-entry into the crop segment, where we had a cluster in Maharashtra, which gave us about INR 465 crore. The company will continue to pursue opportunities in the other states. In fact, Tamil Nadu went down last week, and then we do have both Andhra and Telangana coming into the program this year, the crop program. The company will participate in some of these and seek to expand its crop business. Coming to commercial lines, fire, marine, even last year, we grew higher than industry. And it is a fact that we have been stepping up our presence in the corporate business segment.
The Japanese and Korean segment is a smaller segment out of the overall commercial business, but that's a segment where the business is quite stable and sustainable. So we have secured higher reinsurance capacities during the year, and we should be stepping up for growth even in the Indian commercial business. This is also in a bid to diversify and de-risk the concentration in the motor segment. I talked about as to how the motor composition has shrunk to about just around 65%. Our immediate term goal would be to move it down to about 60%. Having said that, we will continue to grow in motor, it will be the composition part that I talked about.
In motor, our focus will continue to be in the cars and in the commercial vehicle segment. In quarter four, we did grow higher than the industry in motor. We have in H2 of last year balanced our expenses of management under control with the growth, and we have been able to fairly ensure that we are able to grow while maintaining the expenses of management and control at 3 point odd reduction. 3.15% reduction in expense of management is quite substantive given the size of the company. So, to summarize, yes, the growth will also come from health where the proportion of both indemnity and benefit the overall volume is quite stable.
Overall, if you were to broadly look at, we should be looking at at least a 1.35x of industry growth for next year, and with at least a 1% shift away from motor into the other lines.
Perfect, sir. Perfect, perfect. So basically, can I safely say that a crop which is INR 465 crore or INR 470 crore can potentially become, given you are okay to expose, take exposure to three new states, maybe, if you continue or to hold the states in Maharashtra, districts in Maharashtra, then is it safe to assume that we will be around INR 600 crore-INR 700 crore in the current year?
See, the Maharashtra will continue for two more years, 2024, 2025 and 2025, 2026. So, if there is no further insurance penetration, farmer coverage, area under coverage-
Mm.
One can reasonably assume that the INR 465 crore would be intact.
Right.
But in terms of proportion, given the growth in other lines, I would tend to think that crop would come down to about 5% of the overall volumes.
Okay. Got it, sir. My next question is on EoM. Naturally, that's that you partially answered that question, but just wanted to understand whether it will be largely product mix change which will drive the EoM improvement? Or you believe there are internal operating efficiencies which can still play out? I mean, if you want to give broader breakup, how much operating efficiency and how much product mix can contribute to that EoM improvement roadmap?
Yeah, obviously, EOM reduction is a combination of the product mix, the channel mix, is sometimes even geography mix, and of course, the efficiencies that the scale of business can bring in. So naturally, we are seeing the benefits of scale. So even from where we were a couple of years back to the current level of INR 7,500 crore, we have seen the benefits of scale from with respect to pure operating expenses. We expect that to continue. On the product mix, definitely, yes. So a higher level of commercial business can mean and contribute to a reduction of EOM as we go along. So that is something that we would want to look at.
Got it, sir. The third question which I had is, sir, that your core is 109.9.
Mm-hmm.
Your loss ratio is 73.7%. So, from a data keeping point of view, if cat events were not there, or they were, or India was limited to one cat event, which is generally the case, instead of three, then this score, how much you expect in a normalized thing to play out? And then also you spoke about the initial remark that reinsurance commissions also had a negative impact on the core in the current year.
So if things normalize, especially in 2024, this 109.9 combined, improvement in loss ratio and along with the EOM roadmap, what you have, what is a more realistic number, what we can expect it to be in 2025 and 2026, sir?
Yeah. So I did say that, the cat events, even without the impact of the, reinsurance commission reduction that it had, was about 108.8. So that one, so that is the combined ratio for the year ended March 2024. I do agree that, some cat event, of some order and scale will happen, through the year, even, in the coming year. One can reasonably expect that. But, the, with the EoM reduction and, the other efficiencies that can come about, the business team is fairly confident that we should be looking at at least, 1%-1.5% reduction in combined ratio from the current levels.
That, I mean, if it is 109.9, one can expect about 1.5% at least reduction from that level.
Can we expect a similar trend to continue in 2026, meaning from 2 years point of view, sir?
See, the insurance industry is fast changing, so you have new regulations coming in, so one has to really understand the effect of the regulation and the changes that come about.
Yeah.
So one can reasonably expect that, given our track record, we will pursue the path of both, growth and, efficiency when it comes to operating, while staying conservative in our motor third-party reserving. So, we do know that our reserving levels are conservative as compared to other players in the market, and which has an effect on combined ratio. Given our motor dominance and given the effect of at least, actually, if one were to take it to market levels, our combined ratio would probably be 3%-4% lower.
Right. Mm-hmm.
But we want to stay prudent and conservative when it comes to motor third-party reserving.
Got it, sir. And last one on health insurance, sir. Can you give the breakup or contribution of benefit-based, long-term benefit-based to the total premium?
See, our long-term business in relation to total business still stays at about 8.8% of the total top line, and this would include the health benefit, the personal accident, as well as the dwelling business that we write.
Yeah.
So we continue to absorb the costs upfront, which is also baked into the combined ratios that we report. One can say that the regulator is fairly considering the absorption of these costs over the life of the policy. So if that were to materialize, the industry is awaiting a master circular from the regulator on this. If that materializes, you will find a substantive jump in the profitability per se, the reported profits, even from the current year. And when it comes to the health indemnity benefit, we are excluding personal accident.
Yeah.
We have about 44% of the business coming in from the benefit segments, with the balance coming in from the indemnity.
Got it, sir. That's it from my side. Thank you very much.
Thank you. A reminder to all participants, you may press star and one to ask questions. A reminder to all participants, you may press star and one to ask questions. Next question is from the line of Devansh Nigotia from Safe Enterprises. Please go ahead.
Yeah. So thank you for the opportunity. Sir, in case of crop insurance, I think we have reported a loss of almost INR 20-25 crore for this quarter. So, if you look at outcome in terms of its revenue contribution and what should be PBD contribution for FY 2025? And you've mentioned that we have some stop loss over here, and we are reinsuring it, and I think we have some visibility of 5% underwriting profits. So if you can just re-clarify on that as well, so that will be helpful.
Venu, can you take that?
Yeah. Crop insurance for the, you know, financial year 2023-2024, we did a premium of INR 462 crore. The loss ratio has been estimated at 100%. You all know that the scheme itself is operating 80%-110% corridor. So we are taking care of the 10% in the tail part of it. That is why it is, you know, the estimated loss ratio has been around 100%. Naturally, if it is a 100% loss ratio, the underwriting loss is, you know, the car will be much more than the 110. So this is an estimation. We need to, you know, estimate the element of how the rabi season will go up as a part of that.
We expect that the loss ratios will come down from the 100% level when it, finally, you know, estimated from, finalized from the point of view of the final loss. The margins in crop is much lesser, as you all know that. Depending on, you know, the last year it was a drought year. Going forward in 2024, 2025, we can expect betterment in terms of that, if the monsoons are good. These are all purely dependent on the monsoon. We are looking at, we went into that from the point of view of the two parts. One is the 80-110 corridor, which gives us a lesser level of, shocks to us in terms of that.
Secondly, we have also looked at from the point of view of the EoM, that we have been telling about that in the, you know, earlier quarters, call also. So that is actually helping us from the point of view of, you know, fulfilling to the EoM limits. That is also a second part of the story. And, we are looking at, you know, additional states, as Suri has said about that, that may also help us in the EoM perspective. So as far as the, solvency is concerned, it has already been built into that.
So, there is no disallowance from the point of view of the recoverable from the, you know, crops point of view, that luckily we have got every amount that is due from the, you know, kharif season. This is from the crop point of view.
To add to what Venu has said, when it comes to the crop claims ratio provisioning, we have been conservative in providing at 100% of the earnings. I can say now with confidence, in the hindsight of almost 45 days into the next quarter, that the actual results have turned out better, and we could well possibly see some reversal of provisioning in the coming quarter.
Sir, but, I think we did mention that over here we have a kind of insurance arrangement which gives us visibility of underwriting profits of, I think, around 5%. So I'm just trying to understand what has changed here, because, what—I think what you mentioned was that we, we were underwriting this business with an expected combined ratio of 105, and then the reinsurance arrangement allows us to, you know, at the end, make a 5% underwriting profit. I mean, has anything changed over there? Or, because when we started underwriting it, we had, like, a clear visibility on the profits over here.
And another thing is that for FY 2024, the segment underwriting loss is INR 63 crore for crop, based on, so, can you just re-clarify on that number as well? And, from underwriting profit, from claims to underwriting, there should not be much difference, right? Because this is just B2B, and you just, participate in a tender with no employee costs or distribution expense. So why is there a difference between, claim ratio to flowing from claims to underwriting, profit and loss?
Yeah. See, if there is an element of, if you even look at the loss ratio from the crop side, it is 104.2, you see, financially at 2023-2024. It assumed a loss ratio of 100%. The 4% is the additional external cost that is factoring to that. You should understand the reinsurance protection from 100 to 110 cost is around 4%-5%. Okay, that is one cost, is a sunk cost. Secondly, there are additional expenditures in the crop, which is, normally, you know, though 30% is allowed in EoM. The crop has got its own expenses in the form of managing the, you know, crop claim, as well as from the point of view of, you know, enrollment on the, collection side, claiming procurement side.
So all put together around 6.5% is the direct cost in the car station. That is also part of our cost. So when you talk about the 5% margin, I don't remember where we have said about that, you know, clearly. It all depends on, that's what we clearly said while writing the crop itself on two-fold. We have gone into that mainly because of the 81-10 formula that the government has given. That gives rise to a level of, you know, lower LR of 80%. Below that, anything that we need to give back to the government as premium, and more than 110% will be borne by the government in terms of claims. So, it never be the 5%.
5% margin means we need to operate at 88% loss ratio, and really it is possible. That all depends on the monsoon and variable, various other factors which are beyond the control of insurers.
So, to comply with UAM, then we will have to underwrite a business which, where profitability, you know, historically hasn't been that great, which can impact our profits if we scale it up from here on. Any thoughts if you can share on that?
See, the crop business is also subject to vagaries of nature. One would recall that the kharif season was beset with a very indifferent monsoon in July, August of last year, which also impacted the crop yields for the kharif season. The rabi season has turned out much better, bringing the balance to the overall loss ratio there. One wouldn't tend to broad brush, saying that it is just a last minute improvement. But then the risks of the business, in as much as it's subject to vagaries of nature, is very much alive.
So just last question. What would be your guidance for FY 2025 and FY 2026 in terms of revenue growth and combined ratios and ROE?
I thought I answered that, when Sanket asked that question in terms of what we would look for. Growth, yes, we would want to grow at least 1.3-1.35x of industry growth, which certainly would take us much higher in terms of size. And likewise, from the current level, we would be looking for at least a 1.5% improvement in the combined ratio.
Thanks a lot, Sir. Thanks so much.
Thank you. Next question is from the line of Mahek from Emkay Global. Please go ahead.
Yeah, hi. Thank you so much for the opportunity. So, sir, in the previous question, you mentioned that you would like to focus on the CV and PV segments in the motor business. So just wanted to know that among these segments, which segment would you like to grow at a faster rate? And, secondly, how do you see your channel mix shaping up in FY 25?
It's channel mix, let me take the second part first. So we would definitely see our agency business grow stronger. The bank insurance business will, it will also with the addition of the new banks that we had in the previous year, should help in the growth. The company is still in discussion with a couple of other banks, and any positive turnout there can mean a further growth in volumes. Besides the business growth of, from our own sister company, Chola Finance, I think that will also and contribute to our growth in the motor side, across products and, of course, in the benefit business that we provide. So overall, I don't think growth is a challenge for us in the next year.
Okay, sir. And on the motor side, which segment would you like to grow faster?
See, we have been growing. If you see even the charts, we have been growing, our proportion of cars. It's there, page 57, where you can see that, the motor is now 65.9, and then within that, if one were to look at the composition of motor in page 56, you will find now that, the cars and commercial vehicles are now almost sitting equal sized, from 39.5 and 43.8 respectively. So, we will see, further growth in, cars, particularly from the agency segment. The company gets roughly about, 30% of its total motor premium from new vehicles, which has been fairly consistent. So that should also, help in the growth.
The company, however, would look at the two-wheeler segment a little cautiously and would clearly await few government signals and decision with respect to motor third-party premium ratio.
Okay, sir. Thanks a lot. Thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions. Next question is from the line of Anand Bhavnani from White Oak Capital. Please go ahead.
Thank you for the opportunity. Sir, both the businesses of the holdco are growing and expected to grow well. So from the capital raise perspective, how do you see from, let's say, three-year perspective, would we as a company at the holdco level, would have to raise capital to maintain our shareholding in both the businesses, or we would be comfortable the shareholding going down? How are you thinking about it, if you can comment a bit?
So as far as the Chola NBFC is concerned, I think the capital requirement will be far higher because of its growth appetite and the opportunity to grow. And in the last two fundraises, Chola Financial Holdings participated in the first one, and we could maintain the shareholding in the same ratio. The latest one, we did not participate and there was a dilution. As far as Chola Insurance is concerned, I think both the partners are committed to support the need of the growth as far as their insurance growth is concerned. So we would be able to fund if there are any requirement on capital side.
Noted. So if I were to summarize, in Chola Investments, if our shareholding over the next few years due to more capital, if I were to go down, we are comfortable with that, and for insurance, we have enough capability to continue maintaining our shareholding. Is that the right summary?
Yes, fairly right, sir. Yes.
Actually, sir, from value unlock perspective,
Mr. Bhavnani, we're not able to hear you.
Hello. Is this, is this better?
Yes, sir. Please go ahead.
Yeah, thank you. So from the value unlock perspective, just wondering how the board is thinking. I think you must be seized of the matter that a general insurance company coming for an IPO, they are not much different size. And when we look at the combined
Sorry, sir, I think, your line is not... We can't hear you well.
My question is on value unlock. If I'm audible, the value unlock for the business, given that we are at a valuation which is less than the sum of the two holdings?
Yeah. We understand your question, and I think, definitely we will,
... We are aware, and we will look into opportunities to unlock the values at an appropriate time.
Thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions. A reminder to all participants, you may press star and one to ask questions. A reminder to all participants, you may press star and one to ask questions. Next question is from the line of Atul Mehra from Motilal Oswal Asset Management. Please go ahead.
Yeah. Just a follow-up on the previous question. So can a buyback be executed in order to unlock value in the interim that, like, this is the listing will happen and then there is long-term plan around it, but from the cash flow that you have, can you do the buyback so that the underlying value for minority is realized?
Yeah. So I think the board would consider all options and would take an appropriate action. The board is aware of you know the market, the fund requirement of both the businesses and how the regulatory changes are evolving and would take a call at an appropriate time.
Got it. So what is the current stance of the board on this matter, like, in the recently concluded meeting, it was discussed? What is the current stance of the board and what are the various options that are available to unlock value?
Yeah, I think, sure, you would appreciate that. I think we will be happier to discuss with you once a proper call is taken. Then will be easier for us to come and present all the options, why we took the options, et cetera. So, we will definitely do that at an appropriate time.
Got it. Thank you very much, and look forward to more clarification on this matter, maybe at an opportune time, maybe in the next conference call or ahead of it. So it'll be really helpful if we have a proper communication from the board on this matter, so that the minority will be clear of what are the next steps to be in terms of how you're to unlock value. So look forward to that, sir. Thank you very much.
Yeah, thank you.
Thank you. A reminder to all participants, you may press star and one to ask questions. Ladies and gentlemen, as there are no further questions, on behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.
Thank you.