Buy Sundaram Finance Ltd For Target Rs.2,639 - HDFC Securities
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Our Take:
Sundaram Finance Limited (SFL) is a six decade old established player in the vehicle finance business. Consistently high RoAAs and best in class asset quality represents vast experience and deep understanding of the market which the management possesses. Over the years, the company has established strong relationships with its customers- around 60% of the CV borrowers are repeat customers. This also helps company in managing risk profile. The company is an integrated financial services conglomerate with a diversified business model, which helps them hedging against downturns in specific segments and access multiple growth avenues. All three subsidiaries of the companies are performing well. The liquidity position of the company is also sound to tackle current down trend. Despite distressed economic environment the company has posted a decent set of H1FY21 numbers. With monsoon progressing well, the rural economy outlook seems promising. Management has also indicated that the demand is beginning to look up. Consistent dividend payment and no equity dilution demands premium valuation.
View & Recommendation :
We have envisaged growth of 16% CAGR in NII, 13% CAGR in Pre-Provisioning Operating Profit and 7% in Net Profit over FY20-23E for standalone business. Advance growth is estimated at ~8.4% CAGR over the same period. Asset Quality might deteriorate in FY21E but we feel that the situation will start normalizing from FY22E. The core business of the company is currently trading at 4.5x and 4.0x for FY22E and FY23E P/ABV respectively.
We like SFL for its sustainable performance. We have valued SFL on SoTP basis to arrive base case fair value of Rs. 2387 (4.08x FY23E Net worth Adjusted for NPA and subsidiaries cost of investment of FY23E + Rs.549 subsidiaries value after giving 20% holding company discount). Our bull case fair value stands at Rs.2639 (4.64x FY23E Net worth Adjusted for NPA and subsidiaries cost of investment of FY23E + Rs.549 subsidiaries value after giving 20% holding company discount). Investors can buy on dips Buy on dips to Rs.2131 and add further at Rs.1880. The targets are for next six months.
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