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Sundaram Finance (SUF) reported a slow growth of 6.5%/11.3% YoY/QoQ in disbursements. Margins (calc.) were impacted (down 25bps YoY and 7bps QoQ) due to rise in CoF while interest yields (calc.) increased 44bps YoY and down 5bps QoQ. NII for 1QFY25 stood at Rs530cr, up 19% YoY and 3% QoQ vs our estimates of Rs523cr. PPoP for 1QFY25 stood at Rs476cr, up 11% YoY and -21% QoQ vs our estimates of Rs533cr primarily due to lower dividend income. Credit costs decreased to 65bps vs 128bps in 1QFY24. Resultantly, PAT at Rs308cr (up 9% YoY but down 17% QoQ), was 10% below our estimates. This performance was mainly due to muted growth in automotive sector and lesser than expected economic activity due to general elections and an unusually hot summer. RoA/RoE for 1QFY25 stood at 2.3%/12.6% as against 2.7%/14.3% in 1QFY24. Tier 1 Capital/CAR remains adequate at 16.2%/19.3%, respectively. We build in AUM/PPOP/PAT CAGR at 18%/21%/24% over FY24-26E and expect RoA/RoE at 3.2%/17.4% for FY26E. Sundaram is currently trading at 4.3x FY25E P/ABV (core net worth), fairly pricing in growth and profitability. We value the standalone business at 4xFY26 P/ABV (Rs3506) and value subsidiaries at Rs1013, post 20% holdco discount, to arrive at our Target Price of Rs4,317. We continue to maintain Reduce rating.

AUM growth remained strong at 23% YoY

Disbursements for 1QFY25 stood at Rs69bn, up 7% YoY and 11% QoQ. Disbursements in Cars/CE/tractors/CV/Others increased 15.4%/15.6%/18.5%/10%/2.6% QoQ. Disbursements in East and west were down 13.1% and 12.4% QoQ (18% of mix). AUM as on 1QFY25 stood at Rs456.7bn, up 23% YoY and up 4% QoQ. CVs/Cars/CE/Tractors/Others grew 23% YoY, respectively. For the quarter, CVs grew 2% YoY with MHCV declining 6% and Passenger cars were up 3%, however tractors declined 3% YoY. As per the management slower growth was attributed to lower sales across asset classes YoY with only ICVs recording growth. Further, being an election quarter also impacted results.

Lower PPoP lead to below estimates earnings

SUF’s reported NIMs at 4.7%, down 25bps YoY and 7bps QoQ due to rise in CoF. NII at Rs 5.3bn (in line with our estimates) was up 19%/3% YoY/QoQ in 1QFY25, lower than AUM growth due to NIMs compression. Interest yields (on AUM) at 11.5% increased by 44bps YoY and down 5bps QoQ. COF was at 7.16%, up 52bps YoY. PPoP came at Rs4.8bn, was up 10.9%/21.2% YoY/QoQ due to lower other income (dividend income). Credit costs for 1QFY25 was lower at 65bps (on AUM), registering a QoQ decrease of 63bps. PAT at Rs3.1bn, was 10% below our estimates and grew 10%/-18% YoY/QoQ.

Asset Quality impacted sequentially, current collections back to pre-covid levels

SUF reports GS3/NS3 assets at 1.6%/0.8% in 1QFY25 as against 1.9%/1.0% in 1QFY24 and 1.3%/0.6% in 4QFY24. SUF carries Stage 3 provisions at 47%. GNPA/NNPA came in at 2.21%/1.41% in 1QFY25 as against 2.9%/2.0% in 1QFY24. Collections performance has reverted to pre-Covid levels with current collections of current demand at 92%.

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