Target: ₹3,720

CMP: ₹3,740.30

Sundaram Finance reported 6 per cent q-o-q decline in disbursements due to muted growth in automotive sector and lesser than expected economic activity in Q3. Margins were impacted due to rise in CoF (down 49bps y-o-y and 15bps q-o-q) while interest yields increased y-o-y and q-o-q.

Credit costs remained benign while asset quality parameters improved with improvement in collections and recovery activity. PAT at ₹300 crore, was up 24 per cent y-o-y, 4 per cent ahead of our estimates despite miss on NII and operating profits due to lower than anticipated credit costs. RoA/RoE for Q3-FY24 stood at 2.5/14.3 per cent as against 2.6/13.1 per cent in Q3-FY23. Tier 1 Capital/CAR remains strong at 16/20 per cent, respectively.

We build in AUM/PPOP/PAT CAGR at 21/20/20 per cent over FY24-26 and expect RoA/RoE at 2.9/17.5 per cent for FY26.

Sundaram Finance is currently trading at 4.4x FY25E P/ABV (core net worth), fairly pricing in growth and profitability. We downgrade the stock to add post 55 per cent run-up since our initiation in May’23. We value the standalone business at 4x H1-FY26 P/ABV (₹2,886) and value subsidiaries at ₹834, post 20 per cent holdco discount, to arrive at our target price of ₹3,720.