Cholamandalam Investment Q3 FY26: Robust Growth Amid Premium Valuation Concerns

The December 2025 quarter results underscore Cholamandalam's ability to sustain momentum across key operational metrics. Net sales in Q3 FY26 reached ₹7,898.21 crores, representing a 5.43% sequential improvement and a robust 17.31% year-on-year expansion. This growth trajectory reflects the company's expanding presence across vehicle finance, home loans, SME lending, and other diversified financial products through its network of 1,613 branches nationwide.

However, the stock's recent performance reveals investor caution. Trading at ₹1,633.00 as of January 30, 2026, Cholamandalam shares have declined 1.03% in the latest session and are down 4.06% over the past month. The stock currently trades below all major moving averages, including the 5-day, 20-day, 50-day, 100-day, and 200-day levels, signalling technical weakness despite strong fundamental performance. The technical trend has shifted to "mildly bullish" from "bullish" earlier in January, reflecting this near-term consolidation.

Financial Performance: Sustained Profitability Expansion

Cholamandalam's Q3 FY26 results demonstrate consistent profitability improvement across sequential and annual comparisons. Net interest income of ₹7,898.21 crores in Q3 FY26 grew 5.43% from ₹7,491.38 crores in Q2 FY26 and expanded 17.31% from ₹6,732.98 crores in Q3 FY25. This sequential acceleration reflects both volume growth in the lending book and effective yield management.

Profit after tax margin in Q3 FY26 stood at 16.33%, up from 15.48% in Q2 FY26 and 16.16% in Q3 FY25. This margin expansion reflects operational efficiency gains and effective cost management. Operating profit before depreciation, interest, and tax (excluding other income) reached ₹5,344.19 crores in Q3 FY26, with an operating margin of 67.66%, demonstrating stable core profitability despite competitive pressures in the NBFC sector.

Interest expenses in Q3 FY26 totalled ₹3,645.74 crores, up 3.65% sequentially from ₹3,517.31 crores in Q2 FY26. The controlled increase in funding costs relative to asset growth indicates prudent liability management. Employee costs rose to ₹1,093.61 crores in Q3 FY26 from ₹1,073.43 crores in Q2 FY26, reflecting continued investment in talent to support business expansion.

Operational Excellence: Capital Efficiency Leadership

Cholamandalam's operational strength is best exemplified by its superior return on equity, a critical metric for assessing how efficiently a financial services company generates profits from shareholder capital. The company delivered an ROE of 17.91% in the latest period, significantly above the NBFC sector average and reflecting excellent capital deployment capabilities. Higher ROE indicates that Cholamandalam is generating more profit per rupee of equity capital, a key competitive advantage in the capital-intensive financial services industry.

The company's five-year sales growth of 25.86% and EBIT growth of 25.48% demonstrate consistent expansion momentum. This sustained growth trajectory has been achieved whilst maintaining quality standards, as evidenced by the company's "Excellent" quality grade based on long-term financial performance. The ability to grow at this pace whilst preserving profitability metrics speaks to effective underwriting standards and portfolio management.

Balance sheet quality remains robust, with shareholder funds expanding to ₹23,668.69 crores in FY25 from ₹19,593.24 crores in FY24, representing a 20.80% increase. Fixed assets grew to ₹1,779.72 crores, whilst investments reached ₹6,367.54 crores, up 57.79% year-on-year. This investment expansion provides additional revenue streams and supports diversification objectives.

However, the debt-to-equity ratio of 7.23 times reflects the leveraged nature of NBFC operations. Whilst this leverage is typical for the sector and enables growth, it also amplifies risk during periods of credit stress or funding market disruptions. The company's ability to maintain access to diversified funding sources remains critical to sustaining growth momentum.

Asset Quality Analysis: Monitoring Credit Metrics

For NBFCs, asset quality represents the cornerstone of sustainable profitability. Cholamandalam operates across multiple lending segments including vehicle finance, home loans, SME lending, and loan against property products. The diversified portfolio provides risk mitigation through reduced concentration, though it also requires sophisticated underwriting capabilities across different asset classes.

The company's cash flow statement reveals the growth-oriented nature of operations. Cash flow from operations in FY25 stood at negative ₹32,413.00 crores, reflecting aggressive lending book expansion. This is typical for growing NBFCs, where loan disbursements exceed repayments during expansion phases. Cash flow from financing activities of ₹39,795.00 crores in FY25 funded both operational requirements and investment activities, with net cash inflow reaching ₹4,434.00 crores.

On a half-yearly basis for H1 FY26 (April-September 2025), cash and cash equivalents reached ₹10,409.74 crores, representing the highest level recorded and indicating strengthened liquidity positioning. This liquidity enhancement provides flexibility to navigate potential funding market volatility and supports continued business expansion.

Industry Leadership: How Cholamandalam Compares to Peers

Within the competitive NBFC landscape, Cholamandalam occupies a distinctive position with its diversified product suite and pan-India presence. The company ranks sixth by market capitalisation amongst its peer group at ₹1.39 lakh crores, trailing larger players like Bajaj Finance and Shriram Finance but maintaining significant scale advantages over smaller competitors.

Cholamandalam's ROE of 17.68% positions it competitively within the peer group, trailing only Muthoot Finance (20.04%) and Bajaj Finance (18.15%) whilst significantly exceeding Shriram Finance (14.00%). This superior return profile justifies a premium valuation to some extent, though the current price-to-book multiple of 5.31 times represents a substantial premium to book value.

The P/E ratio of 29.67 times sits at the moderate end of the peer spectrum, below Bajaj Finance (31.64x) and significantly below Jio Financial (102.14x), but above Shriram Finance (20.98x) and Muthoot Finance (21.04x). This valuation differential reflects market recognition of Cholamandalam's growth trajectory and quality metrics, though it also limits near-term upside potential unless earnings growth accelerates further.

Notably, Cholamandalam's debt-to-equity ratio of 7.23 times is higher than most peers, reflecting a more aggressive leverage strategy. Whilst this amplifies return on equity during growth phases, it also increases vulnerability to funding market disruptions or credit quality deterioration. Bajaj Finance (3.85x), Shriram Finance (3.87x), and Muthoot Finance (3.76x) all maintain more conservative leverage profiles.

Valuation Analysis: Premium Pricing Limits Upside

Cholamandalam's current valuation metrics reflect strong market confidence in the company's growth trajectory and operational capabilities, but also suggest limited near-term appreciation potential at prevailing levels. The stock trades at a P/E ratio of 29.67 times trailing twelve-month earnings, representing a 34.86% premium to the NBFC sector average P/E of 22 times.

The price-to-book value multiple of 5.31 times significantly exceeds the sector norm, indicating that investors are paying a substantial premium for each rupee of book value. This premium is partly justified by the superior ROE of 17.68%, which generates returns well above the cost of equity. However, at current levels, the valuation leaves little room for disappointment in earnings growth or asset quality metrics.

The proprietary Mojo Score of 71 out of 100 supports a "BUY" rating, reflecting the balance between strong fundamentals and stretched valuations. The overall valuation assessment categorises Cholamandalam as "VERY EXPENSIVE," with the stock having oscillated between "Expensive" and "Very Expensive" grades throughout January 2026. This valuation volatility underscores the market's uncertainty about appropriate pricing levels given the growth-valuation trade-off.

The PEG ratio of 1.48 suggests that the stock is not egregiously overvalued relative to growth prospects, but it does indicate limited margin of safety. A PEG ratio above 1.0 typically signals that investors are paying more than one rupee for each percentage point of earnings growth, reducing the attractiveness of the risk-reward proposition.

Dividend yield of just 0.12% provides negligible income support, with the latest dividend of ₹0.70 per share representing a token payout. The company's growth orientation and capital requirements naturally limit dividend distributions, but this also means that total returns depend almost entirely on capital appreciation rather than income generation.

Shareholding: Institutional Confidence Building

The shareholding pattern reveals a gradual shift in ownership structure, with promoter holding declining marginally to 49.72% in December 2025 from 49.93% in December 2024. This 21 basis point reduction over the year reflects minor stake dilution, likely through employee stock options or strategic equity placements. The Murugappa Group, through Cholamandalam Financial Holdings Limited (44.18%) and associated entities, maintains strong control.

Foreign institutional investor holdings declined to 26.55% in December 2025 from 28.23% in March 2025, representing a 168 basis point reduction over three quarters. This FII selling pressure, totalling 30 basis points in Q3 FY26 alone, contributed to the stock's recent underperformance. With 811 FII holders, the broad-based institutional participation provides liquidity but also creates vulnerability to sentiment shifts.

Mutual fund holdings decreased to 12.84% in December 2025 from 13.32% in September 2025, though they remain above the 12.46% level seen in March 2025. The 48 basis point sequential decline in Q3 FY26 suggests some profit-booking by domestic institutional investors following the stock's strong multi-year run. However, participation by 39 mutual fund schemes indicates continued conviction amongst a significant portion of the domestic institutional community.

Encouragingly, other domestic institutional investor holdings surged to 3.15% in December 2025 from 1.55% in March 2025, representing a 160 basis point increase over three quarters. This category, which includes banks, financial institutions, and other institutional buyers, added 69 basis points in Q3 FY26 alone. This accumulation by alternative institutional investors partially offsets the FII and mutual fund selling, suggesting a rotation rather than broad-based institutional exit.

Stock Performance: Long-Term Strength, Near-Term Consolidation

Cholamandalam's stock performance demonstrates impressive long-term wealth creation despite recent consolidation. Over the past three years, the stock has delivered returns of 129.71%, dramatically outperforming the Sensex return of 38.27% by 91.44 percentage points. This alpha generation reflects the company's consistent earnings growth and expanding market recognition.

However, near-term performance reveals consolidation pressures. The stock has declined 4.06% over the past month and 4.66% over three months, underperforming the Sensex by 1.22 percentage points and 2.13 percentage points respectively. This recent weakness follows the stock reaching a 52-week high of ₹1,831.80, from which it has corrected 10.85%.

The one-year return of 27.19% significantly outpaces the Sensex gain of 7.18%, generating alpha of 20.01 percentage points. This outperformance, however, has also contributed to valuation expansion, with the stock now trading at premium multiples that limit near-term upside potential. The year-to-date return of negative 4.07% marginally underperforms the Sensex decline of 3.46%, indicating that Cholamandalam has participated in the broader market weakness.

From a risk perspective, the stock exhibits high volatility with an adjusted beta of 1.25, indicating that it tends to move 25% more than the broader market in both directions. This high-beta characteristic, combined with volatility of 31.46%, classifies Cholamandalam as a "HIGH RISK HIGH RETURN" investment. The risk-adjusted return of 0.86 over the past year compares favourably to the Sensex risk-adjusted return of 0.64, suggesting that the additional volatility has been rewarded with superior returns.

Investment Thesis: Quality Growth at Stretched Valuations

The investment case for Cholamandalam rests on several pillars: excellent quality credentials, consistent growth momentum, superior capital efficiency, and diversified business model. The company's "Excellent" quality grade reflects sustained financial performance, with five-year sales CAGR of 25.86% and EBIT CAGR of 25.48%. These growth rates, achieved whilst maintaining ROE above 17%, demonstrate the company's ability to scale profitably.

The Mojo Score of 71 out of 100 reflects a balanced assessment across four key parameters. The financial trend is "Positive," with Q3 FY26 marking record highs for net sales, operating profit, and net profit. The quality assessment is "Excellent," based on long-term performance metrics. The technical trend is "Mildly Bullish," reflecting recent consolidation. The valuation is "Very Expensive," acknowledging the premium multiples.

Institutional holdings of 44.11% provide credibility and liquidity support, though recent FII and mutual fund selling has created near-term headwinds. The broad institutional base, with 811 FII holders and 39 mutual fund schemes, suggests that selling pressure reflects profit-booking and portfolio rebalancing rather than fundamental concerns.

Key Strengths & Risk Factors

Outlook: What to Watch

The forward outlook for Cholamandalam hinges on its ability to sustain growth momentum whilst navigating valuation constraints. The company's strong operational track record and diversified business model provide confidence in continued execution, but the premium valuations mean that any disappointment in growth or asset quality could trigger significant multiple compression.

Investors should monitor quarterly disbursement trends, asset quality indicators, and funding cost dynamics closely. The company's ability to maintain ROE above 17% whilst growing the loan book at 20%+ rates will determine whether current valuations can be sustained or expanded. Given the "Very Expensive" valuation grade, patient accumulation during periods of weakness offers better risk-reward than aggressive buying at current levels.