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And the truck rolls on…

We initiate coverage on Sundaram Finance (SUF), a thinly covered stock with best-in-class asset quality and healthy earnings profile with a BUY rating and TP of Rs.2,830. In what is unquestionably unique and a mark of superiority among lenders, SUF has managed its own business growth and invested in several profitable subsidiaries without dilution for nearly 50 years.

Further, deliberately calibrated but unspectacular growth resulting in stable asset quality across CV cycles has been its defining characteristic. From multiple checks, we conclude that cyclical tailwinds in the CV industry bode well for SUF, buttressed as it is by steady growth in tractor financing. Premium valuations are expected to sustain given its healthy earnings growth, stable RoEs and improving asset quality trend.

* Best in class asset quality: SUF’s asset quality has been stable across cycles and has remained better than peers given its strong underwriting practices and credit filters. Its GQP Philosophy (Growth, Quality & Profitability) initiated by Mr. TT Srinivasaraghavan (ex-MD) is entrenched in the company’s culture with growth never gaining precedence over asset quality. Further, quality of its book is evident from the stringent NPA recognition practices followed in the past. We believe with six decades of experience in CV financing, a strong management team and underwriting standards will likely aid SUF in continued better asset quality vs. peers.

* Tailwinds in the CV industry to boost AUM growth: The CV industry which was already reeling under pressure from overcapacity, revised axle load norms and NBFC crisis impacting funding for borrowers, got further impacted by Covid related lockdowns and restrictions. However, after industry volumes touching decadal lows in FY21, several high frequency indicators along with the infra push by the government suggest that the CV industry is ready for an upcycle in the next couple of years, which would drive SUF’s AUM growth at 10% over FY21-24E. Notably, management commentaries from other lenders, logistics players and auto OEMs also point towards robust growth in the CV industry.

* Efficient capital management: SUF’s calibrated approach towards AUM growth, healthy earnings growth and a well- diversified borrowing mix has enabled it to manage its capital without dilution and simultaneously invest in its subsidiaries. Further, time and again it has also monetized some of its investments in subsidiaries which has helped in growing its core book.

* Valuation & Risks: We have valued SUF on SOTP basis and arrived at a target price of Rs.2,830. Our blue-sky scenario suggests potential TP at Rs.3,300. The bear-case TP is at Rs.2,200 implying limited downside from current levels. We recommend a BUY on SUF given its strong management team, structural tailwinds that will push its earnings further, stable asset quality, along with healthy return ratios and capital position. Key risksto the thesis include slower pick up in CV industry volumes, impact on fleet operators’ profitability due to rising input costs, lockdowns and restrictions in key markets.

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