Sundaram Finance

Fresh exposures can be considered in the stock of Sundaram Finance, a conservative investment option in the non-bank financing space. An asset financing company, Sundaram Finance predominantly funds new commercial vehicles (CV) and passenger cars for retail customers.

With CV and passenger car segments posting higher sales growth in the current fiscal (2009-10) and with the growth expected to be sustained, Sundaram Finance's disbursements may grow at a strong pace.

This would, in turn, lead to improving earnings growth, going forward. For the nine months ended December, the company's disbursements grew by 20 per cent to Rs 4000 crore, contributed by a 25 per cent growth in car financing.

At the current market price of Rs 352, the stock trades at a modest valuation of 8.8 times its trailing one-year standalone earnings.

This is at a discount to Shriram Transport Finance (13.33 times) and M&M Finance (10.8 times). The stock trades at 1.6 times its December book value.

Sundaram Finance has a strong branch network of more than 450 branches with predominant presence in the South. This, together with a well-recognised brand name, helps it attract depositors; however, the reliance on depositors has come down over the years.

Currently, the liability profile is quite diversified with 15 per cent of the funds raised from public deposits, 47 per cent from the secured and unsecured debentures and 27 per cent from the bank loans. Sundaram Finance also raises funds by securitising loans.

Business

The receivables of Sundaram Finance stood at Rs 9,500 crore as of December 2009. Commercial vehicle finance and car financing form a chunk of financing, with 60 per cent and 30 per cent share respectively in the total loan book. Rest of it is contributed by equipment finance and tyre finance.

While the commercial vehicle segment witnessed a significant fall in sales in 2008-09, sales have picked up smartly during the first ten months of this fiscal, with stimulus measures and the improvement in the overall economic environment aiding a recovery.

According to ‘Society of Indian Automobile Manufacturers', commercial vehicles sales, which fell by 22 per cent in 2008-09, rebounded in the first ten months of the current fiscal. Commercial vehicles sales grew by 30.4 per cent between April-Jan 2010.

The passenger car segment, on the other hand, has been growing at a strong pace, after flat numbers in 2008-09. Passenger vehicle sales grew 25 per cent in the first ten months of this fiscal.

With excess capacity gradually being absorbed and freight demand picking up, CV sales may continue to make headway even if there is a partial rollback of stimulus. If salary hikes initiated by IT companies spread to other sectors, the demand for cars, which was earlier driven by the Sixth Pay Commission and stimulus incentives, may also continue.

Improving Financials

The company's loan book for the period 2004-09 grew at a modest 13 per cent annually. Sundaram Finance has actually weathered the slowdown of last year relatively well, despite its reliance on CV financing.

Though disbursements fell by 12.5 per cent in 2008-09, the company's adjusted net profits grew by 11 per cent. Despite the slowdown, Sundaram Finance managed to maintain its asset quality notwithstanding moderate slippages.

Net NPAs to advances ratio rose from 0.49 per cent to 0.75 per cent for 2008-09. Asset quality slippages may now bottom out, with the economy showing signs of revival and low interest costs.

For the nine months ended December 2009, Sundaram Finance posted 55 per cent growth in net profits. Improved interest spreads, coupled with strong disbursements, has aided earnings.

The company has a capital adequacy ratio of 14.7 per cent which, coupled with internal accruals, may support a loan growth of around 25 per cent for the company over next one year without having to raise any funds. In the current fiscal, even as the interest spreads of Sundaram Finance have improved, maintaining these spreads would be a challenge as the demand for liquidity increases.

Therefore, the earnings growth for the company would be primarily driven by higher disbursements, which appear likely given the high vehicle sales volumes. A strong branch network continues to offer scope for ‘other income' contribution.

Sundaram Finance also has a presence in insurance, logistics, mutual fund and housing finance segments from which it earns dividend income.

Sundaram BNP Paribas Asset Management is one of the bigger domestic mutual fund houses with asset under management of Rs 13,700 crore. AMC business and Housing Finance have reported a net profit of Rs 10.3 crore and Rs 26 crore respectively for the year-ended 31 March 2009.

Risks

As banks are expected to lend at a base rate and sub-PLR lending ceases to exist from April 1, 2010, the cost of borrowing may trend higher for NBFCs such as Sundaram Finance.

However, Sundaram Finance has a smaller proportion of bank borrowings compared to the other NBFCs.

via BL