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Sluggish commercial vehicle (CV) sales may have slowed down the growth of Sundaram Finance, one of the key lenders in the space. But strong market presence, stable margins and good asset quality have helped it maintain a steady 10-15 per cent growth in net profit. This has been despite increasing risks in the CV segment and the company itself moving to a more stringent provisioning norm.
Sundaram Finance has also managed to grow its loan book, at a time when the underlying CV volumes have been shrinking. This is thanks to its strong market presence in southern India. Investors with a long-term horizon can buy the stock at current levels.
After a prolonged slowdown in the CV cycle, the company should be a key beneficiary of a recovery in the next 18-24 months.
At the current price of Rs 596, the stock trades at 2.3 times its one-year forward core business (CV lending) book value. This is at par with Mahindra and Mahindra Finance and at a premium to Shriram Transport Finance. But Sundaram Finance has a superior asset quality.
The gross non-performing assets (GNPA) at 1.5 per cent of loans is lower than its peers whose GNPA is over 3 per cent of loans.
Sundaram Finance also has stake in other businesses such as home loans, mutual funds and non-life insurance which add ₹100 a share to the stock value.
Modest but steady Sundaram Finance lends mainly to the new commercial vehicle segment which accounts for 55 per cent of its loan book. A quarter of its loans is to the passenger vehicles segment and the balance to the used vehicles segment. With a chunk of its lending to the new CV segment, the company’s loan growth has slowed down in the past year due to the weak macro environment.
From 28 per cent annual growth in disbursements over 2009-12, the growth moderated significantly to 6 per cent in 2012-13. Even in the September quarter, the growth in loan disbursements stood at 6 per cent. But this is understandable, given the sharp decline in volumes of medium and heavy commercial vehicles in the last two years.
Despite shrinking volumes, the company has managed to grow its disbursements through market share gains.
The company’s dependence on the new CV segment makes it prone to cyclicality in the underlying industry.
But in a market downturn, sticking to businesses with less risk and focusing on core competencies is a positive. Sundaram Finance continues to focus on quality rather than growth and has stayed away from the more risky segments.
Some of its peers have delivered better loan growth due to their higher exposure to the used vehicle segment — this segment registered strong growth as customers’ demand for new vehicles in an uncertain economic environment is low.
However, the risk in financing pre-owned CVs is high as they are normally used by customers with a weak credit profile. The pre-owned CV financing market is mostly unorganised with Shriram Transport Finance being the one of the largest players in this segment.
Cautious approach Sundaram Finance has thus pursued a quality growth strategy. It has kept its loan delinquencies under check, despite following stringent asset classification norms. According to the recommendations of the Usha Thorat committee, the classifying of loans into non-performing assets for NBFCs is proposed to be brought at par with banks.
Sundaram Finance has adopted the norms ahead of the regulatory requirement, bringing down the cut-off mark from 180 days to 120 days in 2012-13.
In spite of this, the company’s GNPA at 1.5 per cent of loans is lower than that of its peers.
Sundaram Finance has managed to maintain stable net interest margins, with the return on assets steady at 2.8-3 per cent.
The company’s source of funding is well-diversified between deposits, bank loans and non-convertible debentures.
Other businesses Sundaram Finance’s subsidiaries in home finance and asset management also have good scope to scale up profits.
Sundaram BNP Paribas Home Finance, in which the company has over 50 per cent stake, grew its profit by 35 per cent in 2012-13.
Also, in the long run, there may be good value in Sundaram Finance’s 50 per cent stake in the non-life insurance venture Royal Sundaram.
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