Slowdown in auto sales, particularly in the medium and heavy commercial vehicle segment, has impacted Sundaram Finance, a leading non-banking finance company (NBFC). The company that predominantly funds commercial vehicles (CV) has seen growth in disbursements moderate to 6 per cent in 2012-13 from more than 20 per cent in earlier years.

However, this is a commendable performance when juxtaposed with the decline of 23 per cent in volumes of medium and heavy commercial vehicles.

Also, the company’s net profit grew 15 per cent in 2012-13, in spite of an 81 per cent increase in provision for non-performing assets due to adoption of stricter norms. This has been aided by better net interest margins (NIMs), and higher dividend income from subsidiaries. Besides, Sundaram Finance has been able to maintain asset quality with gross non-performing assets (GNPA) at 1 per cent of loans — much lower than the levels of around 3 per cent reported by peers such as Mahindra and Mahindra Finance and Shriram Transport Finance. The market seems to have taken note of the company’s resilience. Despite Sundaram Finance clarifying that it is not in the race for a banking licence, the stock has gained over 64 per cent during the past year. At the current price of Rs 532, the stock trades at 2.3 times one year forward book value, at par with Mahindra and Mahindra Finance. The stock seems to have factored in the positives. This, along with expected weakness in the CV market in 2013-14, may limit gains in the near to medium term.

That said, Sundaram Finance has a strong presence in the CV finance segment in southern India, and will be a key beneficiary when the tide turns in favours of the CV industry. We recommend investors to hold on to the stock.

Resilient player

Sundaram Finance funds commercial vehicles, passenger cars and construction equipment segment. The chunk of its lending is to the commercial vehicle segment which accounts for 55 per cent of its total loans. Passenger vehicle loans constitute another 25 per cent.

Within the commercial vehicle space, the company mostly lends to the medium and heavy commercial vehicle segment (MHCV).

During 2012-13, the sales growth in the auto industry was a meagre 2.6 per cent. The worst hit was the MHCV segment with volumes declining 23 per cent. High dependence on this segment impacted loan disbursements for Sundaram Finance. However, the company still managed to outperform the industry with disbursements growing 6 per cent, thanks to market share gains.

In good times, the company’s performance has been robust. During 2009-2012, disbursements grew by 28 per cent annually. But, more importantly, it has managed to weather tough times in the past. For instance, in 2008-09, when the CV industry volumes declined 33 per cent, Sundaram Finance managed to cap its decline in disbursements to 11 per cent. In 2011-12 as well, as CV volumes started to moderate the company’s disbursements grew 24 per cent.

For the current year, notwithstanding sluggish industry volumes, the company’s disbursements are expected to grow 3-5 per cent. Sundaram Finance is also looking to expand into new segments such as light and commercial vehicles and new geographies such as the northern and western market. These initiatives should support growth.

This along with its strong market position should help the company rebound , when the CV cycle starts to recover over the next two to three years.

Prudent norms

Sundaram Finance has stayed the course with low loan delinquencies. The company’s GNPA and NNPA was 1 per cent and 0.45 per cent in 2012-13. While this is significantly higher than in the previous year (0.59 / 0.09 per cent), it has mainly been due to stringent asset classification norms adopted by the company.

Currently, the loans whose instalments are overdue for 180 days or more, are classified as NPAs. The Usha Thorat committee has proposed to bring it down to 90 days in a phased manner. As a matter of prudence, Sundaram Finance has adopted the norms ahead of the regulatory requirement, classifying assets based on 120 days in 2012-13.

The NIMs have improved by around 60 basis points in 2012-13, aided by lower cost of funds. Currently, the source of funding is well diversified, panning across public deposits, term funding from banks and financial institutions, and non-convertible debentures. Thus, the company has been able to maintain healthy profitability, with the return on asset at 2.8 per cent in 2012-13.

Other businesses add value

Sundaram Finance, through its subsidiaries, also has a presence in businesses such as home loans, mutual funds, and non-life insurance. Sundaram BNP Paribas Home Finance, in which the company has 50 per cent stake, saw loan disbursements grow by 32 per cent in 2012-13 to Rs 2,572 crore.

A positive trend in the housing loan market and a low base aided growth. Net profit grew by 35 per cent over the previous year. Including the home finance business, the company’s book value increases by close to 15 per cent. The stock then trades at a comfortable 2.1 times one year forward book value.

The mutual fund business’ net profit of Rs 16.8 crore in 2012-13 was 53 per cent higher than the previous year. The asset under management of the company increased by 8.5 per cent to around Rs 12,870 crore.

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