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Growth returning is a positive, focus on market share gain complements the same

Sundaram Finance’s (Sundaram) Q1FY23 result was highlighted by growth returning in standalone business (31%/138% QoQ/YoY growth in disbursement). Commentary around market share gain and continuous focus in that direction are positives. Among subsidiaries, Sundaram Home reported strong 5%/2.5% QoQ growth in PPOP/AUM but MTM losses impacted insurance and 9% QoQ AUM decline led to muted AMC performance. Maintain ADD. Risks involve lower-than-anticipated growth and higher than expected credit cost leading to compression in RoEs.

* Growth returning in Q1FY23 is a big positive. Sundaram reported its highest-ever Q1 disbursements of Rs49bn (31% QoQ growth). Growth was seen across vehicle segments with CV/Car/CE/tractors/others constituting 51%/25%/11%/7%/5% in Q1FY23 vs 50%/24%/12%/7%/7% in Q4FY22, respectively. Consequently, AUM increased by 3.5%/2.4% QoQ/YoY to Rs306bn as of Mar’22. However, standalone pre-provisioning profit (PPOP) was flat QoQ as yields declined 26bps QoQ. PAT declined 25% QoQ as credit cost was negative in Q4FY22.

* Industry data remains strong in categories which could particularly benefit Sundaram. Annualised run-rate for MHCV comes out to 314k as per Jul-22 monthly sales vs 213k annualised sales as per Jul-19. We have arrived at MHCV sales by taking reference to reported monthly sales volumes by top companies which we believe constitute around 90% (based on historical sales trend) of the industry. Similarly, for tractors, assuming top companies represent 40% of industry sales, Jul22 gives annualised sales of 792k vs 710k as per Jul-19. Q1FY23 annual run rate for MHCV/tractors has also been good at 317k/1,380k, respectively.

* Maintain ADD on the backdrop of decent sequential AUM growth with positive commentary on market share, good industrial sales trend in FY23TD and expectation of >14% RoE for main vehicle finance business in FY24E. We revise standalone AUM growth estimates upwards to 15%/18% in FY23E/FY24E. We factor in NIMs, opex, and credit cost of 5.2%/5.0%, 2.4%/2,4%, and 0.5%/0.4% for FY23E/FY24E, respectively. This should lead to standalone RoE of 13.7%/14.2% in FY23E/FY24E. We forecast consolidated RoA/RoE of 2.8%/12.3% in FY24E. Maintain ADD with a revised target price of Rs2,235 (earlier: Rs1,849) based on 2.5x/3.0x (earlier: 2.0x/3.0x) P/B on FY24E book value of NBFC+HFC / insurance business and 15x P/E on AMC’s FY24E PAT. Lending / insurance / AMC / other businesses constitute value of Rs1,908/ Rs194 / Rs119/ Rs15 per share, respectively.

* Sundaram Home’s AUM grew 2.5%/7.7% QoQ/YoY to Rs97.3bn as of Jun’22 with Q1FY23 PAT of Rs473mn (FY22 PAT of Rs1.7bn). The company is seeing increasing demand for home loans in tier 2/3 cities in the southern markets, a priority focus of the company.

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