Cholamandalam Financial Holdings Q3 FY26: Profit Growth Slows Amid Rising Costs and Margin Pressure

The stock surged 4.18% on February 09, 2026, closing at ₹1,720.00, as investors digested the quarterly results. However, the company remains in a bearish technical trend and trades 25.18% below its 52-week high of ₹2,299.00, reflecting persistent investor caution about its financial trajectory and operational efficiency.

The September 2025 quarter (Q2 FY26) showcased Cholamandalam Financial Holdings' struggle to maintain profitability momentum. Net sales reached ₹9,461.41 crores, up 1.78% quarter-on-quarter and 16.95% year-on-year, demonstrating the company's ability to expand its loan book and fee-based income. However, operating profit (PBDIT excluding other income) declined to ₹5,102.29 crores with a margin of 53.93%, down from 55.45% in the previous quarter, signalling deteriorating operational efficiency.

Financial Performance: Margin Compression Amid Cost Pressures

Cholamandalam Financial Holdings' Q2 FY26 financial performance reveals a troubling pattern of margin erosion despite top-line growth. Net sales of ₹9,461.41 crores represented a sequential increase of 1.78% from Q1 FY26's ₹9,296.32 crores, but the year-on-year growth of 16.95% marks a deceleration from the robust 21.80% expansion witnessed in the previous quarter. This slowdown in revenue momentum, coupled with rising operational costs, has squeezed profitability metrics across the board.

The company's consolidated net profit for Q2 FY26 stood at ₹549.92 crores, declining 4.94% quarter-on-quarter from ₹578.50 crores in Q1 FY26. On a year-on-year basis, profit growth remained anaemic at 4.64%, a stark contrast to the double-digit growth rates the company delivered in previous periods. This deceleration stems primarily from ballooning employee costs, which surged to ₹1,197.90 crores in Q2 FY26 from ₹1,050.45 crores in Q1 FY26—a sequential jump of 14.04%—reflecting aggressive hiring and salary increments.

Interest expenses also climbed to ₹3,517.75 crores in Q2 FY26, up 1.44% from ₹3,467.67 crores in the previous quarter and 15.05% year-on-year, reflecting higher borrowing costs and an expanding loan book. The PAT margin compressed to 12.83% in Q2 FY26 from 13.55% in Q1 FY26, underscoring the challenge of maintaining profitability in a rising cost environment. Operating margin (excluding other income) fell 152 basis points quarter-on-quarter to 53.93%, a concerning trend for a company operating in the competitive NBFC space.

Operational Challenges: High Leverage and Weak Return Metrics

Cholamandalam Financial Holdings operates with an exceptionally high debt-to-equity ratio of 12.91 times on average, positioning it among the most leveraged players in the NBFC sector. This aggressive capital structure, while enabling rapid loan book expansion, exposes the company to significant refinancing and interest rate risks. The company's average EBIT-to-interest coverage ratio stands at a weak 1.55 times, indicating limited cushion to absorb earnings volatility or rising borrowing costs.

More concerning is the company's return on equity (ROE), which remains conspicuously weak at effectively 0.0% on average over the assessment period, though the latest reported ROE stands at 16.30%. This stark divergence suggests historical underperformance in generating returns for shareholders relative to equity deployed. The average return on capital employed (ROCE) of 10.22% also falls short of industry standards, reflecting suboptimal capital efficiency. For context, higher ROE is a critical indicator of profitability and capital efficiency—strong companies typically deliver ROE above 15%, whereas Cholamandalam's historical average signals persistent challenges in translating asset growth into shareholder value.

The company's balance sheet reveals shareholder funds of ₹12,515.28 crores as of March 2025, up from ₹10,241.73 crores a year earlier, reflecting retained earnings and capital accretion. However, current liabilities ballooned to ₹2,31,964.04 crores from ₹1,84,803.63 crores, highlighting the company's reliance on short-term funding to support its lending operations. Investments stood at ₹24,300.17 crores, primarily reflecting the company's stakes in its operating subsidiaries, including Cholamandalam Investment and Finance Company (CIFCL), the group's flagship vehicle financing arm.

Industry Context: NBFC Sector Headwinds

The NBFC sector in India faces a challenging operating environment characterised by rising funding costs, regulatory scrutiny on asset quality, and intensifying competition from banks expanding their retail lending portfolios. Cholamandalam Financial Holdings, as a holding company, derives its value primarily from its subsidiaries' performance, particularly CIFCL, which operates in the vehicle finance segment—a market experiencing demand moderation amid economic uncertainty and higher vehicle prices.

The company's 5-year sales growth of 21.94% and EBIT growth of 23.82% demonstrate its ability to scale operations, but the deceleration in recent quarters suggests market saturation and competitive pressures. The NBFC sector delivered a 1-year return of 21.39%, outpacing Cholamandalam Financial Holdings' 16.87% return, indicating relative underperformance. The company's below-average quality grade reflects concerns about its high leverage, weak interest coverage, and inconsistent profitability metrics.

Peer Comparison: Valuation Discount Justified by Weak Fundamentals

Cholamandalam Financial Holdings trades at a price-to-earnings (P/E) ratio of 13.91 times, significantly below the peer group average of approximately 47 times and the industry P/E of 24 times. This valuation discount reflects investor concerns about the company's leverage profile, weak historical ROE, and decelerating profit growth. The stock's price-to-book value (P/BV) of 2.27 times is also below peers like HDB Financial Services (3.10 times) and Poonawalla Fincorp (3.55 times), suggesting limited premium for its asset quality or growth prospects.

The company's dividend yield of 0.08% is among the lowest in the peer group, with a payout ratio of just 1.12%, indicating management's preference to retain earnings for growth rather than reward shareholders. While this strategy may support long-term expansion, it offers little immediate income appeal for yield-focused investors. The valuation discount appears justified given the company's weak profitability metrics, high leverage, and operational challenges.

Valuation Analysis: Attractive Entry Point or Value Trap?

At the current market price of ₹1,720.00, Cholamandalam Financial Holdings trades at a P/E of 13.91 times and a P/BV of 2.27 times, both below historical averages and peer benchmarks. The company's enterprise value (EV) to EBITDA multiple of 10.28 times and EV to sales of 5.74 times suggest moderate valuation, but these metrics must be viewed in the context of deteriorating profitability and high leverage. The PEG ratio of 1.64 times indicates the stock is reasonably priced relative to earnings growth expectations, though recent deceleration in profit growth raises questions about sustainability.

The stock's valuation grade is classified as "Attractive," having moved from "Very Attractive" in recent months, suggesting improving sentiment despite fundamental challenges. However, the overall Mojo Score of 29 out of 100 places the stock firmly in "Strong Sell" territory, reflecting concerns about quality, technical trends, and financial performance. The stock trades 25.18% below its 52-week high of ₹2,299.00 and 24.04% above its 52-week low of ₹1,386.60, indicating significant volatility and uncertain investor conviction.

Shareholding Pattern: Institutional Caution Evident

Cholamandalam Financial Holdings' shareholding pattern reveals subtle but significant shifts in institutional confidence. Promoter holding stood at 46.38% in December 2025, declining marginally from 46.45% in March 2025, reflecting minimal dilution. Foreign institutional investors (FIIs) reduced their stake to 16.47% in December 2025 from 17.67% in March 2025, a decline of 120 basis points, signalling caution among global investors about the company's growth trajectory and profitability challenges.

Mutual fund holdings increased to 21.06% in December 2025 from 20.26% in March 2025, suggesting domestic institutional investors remain cautiously optimistic about the company's long-term prospects despite near-term headwinds. Insurance companies marginally increased their stake to 1.26% from 1.00%, while other domestic institutional investors (DIIs) raised holdings to 1.69% from 1.01%, indicating selective accumulation by domestic players. Overall institutional holding stands at 40.48%, reflecting moderate confidence but far from overwhelming conviction.

Stock Performance: Volatile Returns and Technical Weakness

Cholamandalam Financial Holdings has delivered mixed returns across timeframes, underperforming the broader market and its NBFC peer group over recent periods. The stock posted a 1-year return of 16.87%, outpacing the Sensex's 7.97% gain and generating positive alpha of 8.90 percentage points. However, over the past 6 months, the stock declined 6.73% while the Sensex rose 5.27%, resulting in negative alpha of 12.00 percentage points and highlighting recent underperformance.

Over longer periods, the stock has delivered impressive returns—177.20% over 3 years and 216.64% over 5 years—significantly outpacing the Sensex and generating substantial alpha. However, recent volatility and technical weakness have eroded investor confidence. The stock's beta of 1.24 indicates higher volatility than the market, with risk-adjusted returns of 0.44 over the past year, below the Sensex's 0.69, classifying it as a "high risk, medium return" investment.

The stock entered a bearish technical trend on January 14, 2026, at ₹1,809.85, with weekly MACD, Bollinger Bands, KST, and OBV indicators all signalling bearish sentiment. The stock trades below all key moving averages—5-day (₹1,683.43), 20-day (₹1,703.24), 50-day (₹1,803.36), 100-day (₹1,854.43), and 200-day (₹1,888.09)—confirming the downtrend. Immediate support lies at the 52-week low of ₹1,386.60, while resistance is clustered at the 20-day moving average around ₹1,703.24, with major hurdles at ₹1,854.43 and ₹1,888.09.

Investment Thesis: Weak Quality, Bearish Technicals, Attractive Valuation

Cholamandalam Financial Holdings presents a complex investment case characterised by attractive valuation, weak quality fundamentals, bearish technical trends, and positive short-term financial momentum. The company's Mojo Score of 29 out of 100 places it in "Strong Sell" territory, reflecting significant concerns across multiple parameters. The stock's quality grade is "Below Average," driven by high leverage (debt-to-equity of 12.91 times), weak historical ROE, and suboptimal interest coverage (1.55 times).

The financial trend is classified as "Positive" based on record quarterly sales and profit in recent periods, but margin compression and decelerating growth raise sustainability concerns. Technical trends remain firmly bearish, with the stock below all major moving averages and multiple indicators signalling weakness. Valuation is classified as "Attractive" at a P/E of 13.91 times and P/BV of 2.27 times, offering a discount to peers and historical averages, but the discount appears justified by fundamental weaknesses.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The company's ability to navigate rising funding costs, stabilise margins, and improve capital efficiency will determine whether the current valuation discount represents an opportunity or a value trap. Investors must weigh the Murugappa Group's credibility and the company's long-term growth track record against near-term operational challenges and structural leverage concerns. The bearish technical trend and weak quality fundamentals suggest patience is warranted before committing capital.