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Lenders in the commercial vehicles (CV) space have had to cope with challenging times, as the sector saw sharp decline in volumes over the last two years.
The medium and heavy commercial vehicles (MHCV) segment has had it worse. From about 3,50,000 units in 2011-12, the number of vehicles sold in the MHCV space plunged to 200,000 units in 2013-14.
While this has slowed down the growth of Sundaram Finance — one of the leading lenders in the space — stable margins and good asset quality have helped the company's performance even in tough times.
The company clocked a healthy return on equity of 21 per cent in 2013-14, higher than peers such as Shriram Transport Finance and Mahindra and Mahindra Financial Services. This was despite the modest 8 per cent growth in profit in 2013-14.
While the stock has outperformed the market in the last one year, investors with a long-term horizon can still buy the stock for a couple of reasons. One, while the turnaround in the CV industry will be gradual and depend on the pick-up in economic activity, some signs of revival are visible.
After the 23-25 per cent decline in MHCV volumes for two consecutive years, sales volumes have grown 5.3 per cent during the April-November 2014 period, compared with the year-ago period. The recovery in the CV cycle over the next year or so should provide a leg up to the company’s disbursements.
From an annual growth of 28 per cent in disbursements over 2009-12, growth moderated to 6 per cent in 2012-13 and dipped 3 per cent in 2013-14. However, the company’s sound business model and strong market presence should drive higher growth as volumes in the MHCV segment start to recover.
Sundaram Finance’s focus on quality should keep risks under check even as growth returns. A chunk (about 55 per cent) of the company’s lending is to the new CV segment, which reduces risk. Passenger vehicle loans constitute another 25 per cent.
Better placed Another reason why the stock is a good bet is because the company is better placed to implement more stringent norms mandated by the RBI recently for non-banking finance companies.
Among the most significant has been the tightening of the non-performing asset (NPA) recognition norms.
According to the new regulation, NBFCs will now have to classify loans as NPAs when borrowers default for 90 days or more, as against 180 days earlier.
Sundaram Finance has been adopting a 120-day norm since 2012-13. As the RBI has allowed NBFCs to implement these norms in a phased manner — 90 days by the end of March 2018, the impact on the company’s earnings will be staggered as it moves towards the 90-day cut-off. It is better placed than players such as Shriram Transport Finance which still adopts a 180-day practice.
Sundaram Finance has also kept its loan delinquencies under check, despite following stringent asset classification norms.
The company’s gross non-performing assets (GNPA) at 1.23 per cent of loans in 2013-14 are lower than that of peers such as Shriram Transport and M&M Finance. While the GNPA has moved up during the September quarter to 2.2 per cent, it is a seasonal trend, and is likely to slide back to 2013-14 levels by the end of this fiscal.
Still attractive The stock of Sundaram Finance has more than doubled over the last year and hence valuations are at an all-time high at 3.3 times its one-year forward book value. The stock has re-rated significantly on the back of expectations of a revival in the CV cycle and its steady performance in tough times vis-à-vis peers in the space.
Mahindra and Mahindra Financial Services, for instance, saw a sharp fall in valuations from 2.9 times to 2.4 times owing to the steep rise in GNPA (to 6.3 per cent) and fall in return on equity to 13.7 per cent as of September 2014 from 18.6 per cent as of March 2014. Shriram Transport too, trading at 2.2 times its forward book value, has a higher GNPA of 3.7 per cent and ROE of 14 per cent.
In contrast, Sundaram Finance has a much lower NPA level and commands a strong ROE of 19-21 per cent. Bajaj Finance, another stock that trades on a par with Sundaram Finance, also has good asset quality and healthy ROE of 18 per cent.
In the light of the challenges that some of the other NBFCs may face in keeping with the changes in regulatory requirements, Sundaram Finance may continue to trade at a premium due to its sound fundamentals.
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