Hold Sundaram Finance Ltd For Target Rs.2,450

Healthy performance; growth catalyst visible

Sundaram Finance (SFL) is a Chennai-based NBFC with a presence in auto financing, home finance, asset management and general insurance business. Major value is derived from asset financing (vehicle financing) with AUM of | 31226 crore as of December 2020. The company has 583 branches with a substantial presence (~55%) in southern India.

Steady performance; AUM growth to improve, going ahead

Net interest income was up 21.4% YoY to | 537 crore on the back of improved margins and resilient asset quality. Net interest margin (calculated)) for the quarter increased by ~70 bps QoQ to 6.9%. As a result of cost control, opex was down 4.2% YoY, 0.7% QoQ. Thus, C/I ratio was down to 27.7% vs. 30.8% QoQ. Provisions declined QoQ 13% to | 69.7 crore. As a result of healthy topline, controlled costs and lower provisions, PAT jumped ~45% YoY and 26% QoQ to | 242 crore.

AUM growth on a yearly basis remained muted at 2.4% YoY to | 31226 crore. Share of CV segment in the overall mix has seen a decline in the past few quarters and is now at 48.2%, down from 52.6% YoY while share of tractors and construction equipment has increased to 7.2% and 11.2% vs. 5.8% and 10.1% YoY, respectively. Disbursement during the quarter has seen healthy growth of 36.5% QoQ and was at | 4334 crore. Pick-up in disbursement was led by car and tractor segment, which were up 11% and 8% YoY, respectively. Asset quality performance was encouraging as proforma GNPA fell 4 bps QoQ to 2.47% while NNPA was marginally up 4 bps QoQ to 1.51%. Restructured account was at 2.47% in Q3FY21.

Performance of subsidiaries decent

Housing finance subsidiary saw a sequential pick-up in disbursement, up 1.4x QoQ, though YoY it was down 54%. Headline GNPA was at 3.52%, while proforma GNPA was slightly higher at 4.23%. PAT on 9MFY21 basis was up 14% YoY to | 155 crore. General insurance business saw improved profitability with PAT of | 289 crore vs. | 12 crore loss YoY, led by improvement in combined ratio at 107% vs. 114% YoY. AMC saw slight decline in AUM YoY but higher proportion of equity AUM and cost control led earnings trend upwards by 52% YoY to | 32 crore.

Valuation & Outlook

Consistent business growth, focus on asset quality and strong & conservative management has led SFL to command premium valuation compared to its peers. Going ahead, infrastructure push by government and scrappage policy could act as a catalyst to bolster business growth as well as earnings trajectory. Performance of subsidiaries is decent but unlocking value will take time. We expect healthy earning trajectory at 15-16% in FY21- 23E and RoA to remain at 2.2-2.3%. Valuing the stock on an SOTP basis, we arrive at a target price of | 2450 (| 1920 earlier) but due to recent run-up in stock price, we downgrade our recommendation from BUY to HOLD.

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