SECTOR: FINANCIAL
Sundaram Finance
STOCK INFO.
BLOOMBERG
BSE Sensex : 26297
S&P CNX : 7860
SUF:IN
REUTERS CODE
13 October 2014
Initiating Coverage
(INR CR)
BUY
INR1232
SNFN.NS
Y/E MARCH
FY14
FY15E
FY16E
We recommend to BUY Sundaram Finance for an 18 month
SOTP target of INR1,700.
INVESTMENT ARGUMENT:
NII (INRCr.)
OP (INRCr.)
NP (INRCr.)
EPS (INR)
EPS Growth (%)
BV/Share (INR)
P/E (x)
P/BV (x)
ABV/Share (INR)
P/ABV (x)
RoE (%)
RoA (%)
Div yld (%)
KEY FINANCIALS
Shares Outstanding (Cr)
Market Cap. (INR Cr)
Market Cap. (US$ M)
912
720
443
39.8
8
216
31
5.7
211
5.8
19.7
2.9
0.8
1,008
828
513
46.2
16
250
27
4.9
241
5.1
19.8
3.2
0.9
1,158
968
600
54.0
17
290
23
4.3
283
4.4
20.0
3.2
1.0
11.11
13,688
2,281
16%
19%
25
3 yrs NII Growth to FY17E (%)
Past 3 yrs NP Growth (%)
Dividend Payout (%)
STOCK DATA
52-W High/Low Range (INR)
Major Shareholders (as of Sep'14)
Promoter
Non Promoter Corp Holding
Public & Others
Average Daily Turnover(6 months)
Volume
Value (INR million)
1/6/12 Month Rel. Performance (%)
1/6/12 Month Abs. Performance (%)
1351/501
36.3
13.2
50.6
7,187
6.3
20/81/142
23/65/112
Maximum Buy Price: INR1300
Best in class proxy to ride the upcycle:
Vehicle financing business
(standalone company) makes up 80% of our SOTP wherein CVs
constitute 50% of the business while the balance is contributed by
cars, tractors and construction equipment. On the back of an industry
wide volume slowdown, Sundaram adopted a cautious approach and
lowered its loan book growth to 9% between FY11-14 as compared to
30% for its peers. As a result Sundaram's GNPA stood at 1.2% in
FY14 as against peer group average of 3.4%. We believe CV cycle is
currently witnessing a turnaround and is expected to resume growth
in H2FY15 thereby driving 17% loan book CAGR over FY14-17E.
Optimally diversified liability franchisee reduces funding costs:
Sundaram's liability franchisee is optimally spread whereby it has a
higher proportion of NCDs and FDs (63%) as compared to peers
(34%). The cost of these deposits being lower, the company is able to
maintain its borrowing costs well below that of its peers across
economic cycles. Also, Sundaram enjoys a higher credit rating than its
peers due to strong parentage (TVS) and better asset quality which
further lowers its funding cost on term loans.
Promising outlook of housing business:
Presence in the right
customer segment (self employed-50%) and under-penetrated South
India market (~90% of book) and access to liabilities owing to the
parentage should help the business grow at over 20% for a reasonable
period of time with ROEs in excess of ~22%.
Valuations & View:
We have valued the company on SOTP basis.
During the previous automobile upcycle, Shriram Tranport traded at
an average of 4x forward P/ABV in FY11 while M&M Finance traded
at 3.5x. We value the standalone business of Sundaram at 4x FY17E
ABV by allotting it a scarcity premium over peers owing to its superior
business model characterized by consistently higher ROEs and best in
class asset quality. We value the home finance business at 4x FY17E
ABV given the inherent strength of the brand name and superior return
ratios. It contributes to 12% of the SOTP. General insurance, AMC
and other investments make up for the balance 8% of SOTP. Unlike
its peers, Sundaram has not resorted to capital raising as higher ROAs
translated to strong internal accruals which is enough for its growth
requirements. Further, the business model also supports a dividend
payout ratio of 25%. We recommend "BUY" for an 18 month target
price of INR1,700 - potential upside of 38%.
Jehan Bhadha
(jehan.bhadha@motilaloswal.com); Tel:+912233124915
 Motilal Oswal Financial Services
Sundaram Finance
CONCERNS
Deterioration in asset quality:
Currently, the CV industry is under pressure due to the economic
slowdown. On the cost front, the diesel price hikes, increase in toll rates and higher driver costs are
adding pressure on the ability of transport operators to repay loans.
Regional Concentration:
While asset quality risks have been low, a sudden shock in any of the
southern states (60% of business) could result in an increase in GNPAs. Further, dominant southern
focus limits growth opportunities as well.
Portfolio concentration risk:
The Sundaram Finance group has maintained its significant market
share in the CV finance segment in southern India. In the car financing segment the company has
steadily increased its presence and over 35 per cent of the portfolio represents car financing, although
it remains a relatively small player (a few private sector banks have a stronghold in the segment).
While the group's presence in the housing finance and asset management businesses has helped it
diversify its business profile to some extent, the scale of these businesses is likely to remain modest
over the medium term.
BACKGROUND
Sundaram Finance commenced operations in 1954 as a wholly owned subsidiary of Madras Motor
and General Insurance Company Ltd, a member of the TVS group of companies. The company was
listed in 1972, when TVS sold its ownership to the public. Sundaram Finance is the only non-banking
financial company (NBFC) in India with a track record of over six decades in the commercial
vehicles (CV) financing business. The management's experience and understanding of the vehicle
finance business has enabled the company to withstand multiple business cycles. The company has
a nationwide network of 575 branches. The group also has presence in housing finance, asset
management, and non-life insurance segments. The housing finance business is conducted through a
joint venture with BNP Paribas, wherein BNP Paribas has 49.9 per cent equity stake in the venture.
The asset management business was previously conducted through a joint venture, where BNP
Paribas Asset Management had 49.9 per cent equity stake. However, in October 2010, Sundaram
Finance acquired the latter's equity stake in both the asset management company and the trustee
company, thereby making the entities its wholly owned subsidiaries. The non-life insurance business
is operated through Royal Sundaram Alliance Insurance Company Ltd, a joint venture between
Sundaram Finance and the RSA group, one of the largest general insurers in the United Kingdom
(UK), wherein Sundaram Finance has a 49.9 per cent equity stake.
SOTP based Target Price
Business
Vehicle Finance
Home Finance
AMC
Insurance
Other Investments
Total
Stake
100%
50.10%
100%
49.90%
FY17 Multiple
4.0
4.0
3%
3.0
0.5
Per Share Value
1354
211
69
51
15
1700
Contribution to SOTP
80%
12%
4%
3%
1%
100%
13 October 2014
2
 Motilal Oswal Financial Services
Sundaram Finance
IVRCL: Financials and Valuation
Financials and valuation
Income Statement
Y/E March
Interest Income
Interest Expenses
FY13
1,915
1,082
833
12%
216
1,050
19%
384
665
21%
73
593
183
31%
410
15%
FY14
2,076
1,164
912
9%
238
1,150
10%
430
720
8%
74
647
204
32%
443
8%
FY15E
2,203
1,195
1,008
11%
273
1,282
11%
453
828
15%
79
749
237
32%
513
16%
FY16E
2,518
1,360
1,158
15%
314
1,472
15%
505
968
17%
91
877
277
32%
600
17%
(INR Cr)
FY17E
3,036
1,627
1,409
22%
377
1,786
21%
599
1,187
23%
110
1,077
340
32%
737
23%
Expect 16% NII CAGR
Net Interest Income
Change (%)
Non Interest Income
Net Income
Change (%)
Operating Expenses
Pre Provision Profits
Change (%)
Provisions (excl tax)
PBT
Tax
Tax Rate (%)
FY14-17 PAT CAGR of 19%
Profit After Tax
Change (%)
Balance Sheet
Y/E MARCH
Equity Share Capital
Reserves & Surplus
Net Worth
Deposits
Change (%)
Other Borrowings
Total Deposits and Borrowings
Other Liabilities
Total Liabilities
Balance with RBI
Investments
Loans
FY13
111
1,976
2,087
11,467
11%
-
11,467
1,084
14,638
874
1,044
11,585
332
801
14,638
FY14
111
2,294
2,405
11,776
3%
-
11,776
1,234
15,415
675
1,447
12,006
347
940
15,415
FY15E
111
2,664
2,775
13,010
10%
-
13,010
1,329
17,114
625
1,805
13,301
355
1,040
17,127
FY16E
111
3,108
3,219
15,244
17%
-
15,244
1,499
19,962
575
2,135
15,698
366
1,190
19,964
(INR Cr)
FY17E
111
3,676
3,789
18,633
22%
-
18,633
1,770
24,192
525
2,510
19,395
379
1,340
24,150
Expect 17% loan CAGR over
FY14-17
Net Fixed Assets
Net Current Assets
Total Assets
Asset Quality
GNPA
NNPA
GNPA Ratio
NNPA Ratio
PCR
E: MOSL Estimates
125
53
1.0%
0.5%
57%
154
56
1.2%
0.5%
64%
304
100
2.2%
0.7%
67%
254
76
1.5%
0.5%
70%
(%)
104
26
0.5%
0.1%
75%
13 October 2014
3
 Motilal Oswal Financial Services
Sundaram Finance
IVRCL: Financials and Valuation
Financials and valuation
Ratios
Y/E March
Spreads Analysis (%)
Avg. Yield-Earning Assets
Avg. Yield on loans
Avg. Cost of Deposits and Borrowings
Net Interest Margin
Profitability Ratios (%)
RoE
RoTA
Int. Expense/Int. Income
Non Int. Inc./Net Income
Efficiency Ratios (%)
Cost to Income
Emp. Cost / Operating Expenses
Provisions to NII
FY13
14.4
16.4
9.9
4.5%
FY14
14.6
17.1
10.0
4.6%
FY15E
14.4
16.9
9.5
4.8%
FY16E
14.4
16.9
9.5
4.9%
FY17E
14.6
16.9
9.5
5.0%
Higher margins led by lower
borrowing costs
21.2
3.0
56
21
19.7
2.9
56
21
19.8
3.2
54
21
20.0
3.2
54
21
21.0
3.3
54
21
37
42
9
37
42
8
35
42
8
34
42
8
34
43
8
Valuation
Book Value Per Share (INR)
Change (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
Change (%)
Price-Earnings (x)
Dividend Per Share (INR)
Dividend Yield (%)
E: MOSL Estimates
188
216
-42%
6.6
183
6.7
37
-42%
33.4
250
15%
5.7
211
5.8
40
8%
30.9
11.0
0.9%
290
15%
4.9
241
5.1
46
16%
26.7
12.0
1.0%
341
16%
4.3
283
4.4
54
17%
22.8
13.0
1.1%
18%
3.6
339
3.6
66
23%
18.6
9.0
0.7%
10.0
0.8%
13 October 2014
4
 Motilal Oswal Financial Services
Sundaram Finance
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Disclosure of Interest Statement
1. Analyst ownership of the stock
2. Group/Directors ownership of the stock
3. Broking relationship with company covered
4. Investment Banking relationship with company covered
Sundaram Finance
No
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