Institutional Equities
Sundaram Finance 20 May 2021
Reuters: SUNDARAMFIN.BO; Bloomberg: SUF IN
Strong franchise ; initiate with an Accumulate ACCUMULATE Sundaram Finance (SUF) has demonstrated its ability to maintain profitability while Sector: BFSI retaining healthy asset quality over economic cycles, comfortable capitalization and a well diversified resource profile. The focus on growth, quality, profitability, high CMP: Rs2,421.8 repeat customer base, strong market understanding and seasoned management
team place the business in strong position. The GNPAs remain better than the peers Target Price: Rs2,374
by wide margins, testimony to its strategy of chasing quality over growth. Downside: 2.0% Remarkably, SUF has not raised capital in over four decades and has built other businesses of insurance (LTM GWP of Rs29.8bn), housing finance (AUM of Sonal Gandhi ~Rs91bn), AMC (AAUM of Rs 355 bn) through internal accruals apart from Research Analyst standalone vehicle finance business (AUM Rs 312bn). SUF’s long term credit rating [email protected]
is at AAA, highest amongst peers operating in the same line of business. +91 9552595929 Historically, CV contributed over 50% of SUF’s AUM. Thus we believe it to be the Key Data largest beneficiaryCoverage Initiating of growth once CV demand revives. We expect disbursement in standalone business to grow at ~31% CAGR over FY21E-23E translating into AUM Current Shares O/S (mn) 111.1 growth of ~10% over the same period. The RoA and RoE are likely to reach 2.6% and 14.5% by FY23E (last 5-yr avg. of 2.5% and 14%, respectively). The stock is currently Mkt Cap (Rsbn/US$bn) 269.1/3.7 trading at 4x 12-m forward P/ABV vs a 5-yr avg 12m fwd P/ABV of 3.4x. We initiate 52 Wk H / L (Rs) 2884/1181 with an Accumulate rating and Price Target of Rs 2,374 (2% downside). We value Daily Vol. (3M NSE Avg.) 48,470 standalone business at Rs 1,848 per share, valuing at 3.75x P/ABV, (in line with Initiating Coverage Initiating Cholamandalam Investment) and value other businesses at Rs526 (per share) after 20% holding company discount (Refer to our SOTP table). The second wave of covid Share holding (%) 3QFY21 2QFY21 1QFY21 has acted as a dampener to recovery in CV sales witnessed in 4Q. Furthermore, the Promoter 35.9 35.9 35.9 asset quality issue is likely to exacerbate due to decline in fleet utilization and increase in diesel prices, thereby impacting operator profitability. This should cap the Public 63.3 63.2 63.2 sector re-rating over the next two quarters thereby limiting any upside in the stock. Others 0.8 0.8 0.8 Largest beneficiary of CV upcycle: The industry CV volume growth has been in negative territory for 7 quarters before registering a 43% growth in 4QFY21. Only once in last 64 One Year Indexed Stock Performance quarters the CV growth has been in a negative territory for over 7 quarters in a row. We believe that the huge replacement demand has been built up, however for the same to 260 240 materialize – (a) the operator cash flow needs to improve (witnessed improvement from 220 200 Nov’20 to Mar’21, before the onset of second covid wave) (b) pick-up in private and public 180 capex. CVs contribute ~50% of SUF’s AUM and it should be the largest beneficiary once 160 140 the demand revives. 120 100 Superior asset quality: While the average GNPA’s for peer auto NBFC’s have ranged 80 60 between 3.5%-8%, SUF reported average GNPA of 1.7% over the last 5 years due to May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21 strong underwriting practices and high proportion of repeat customers. 65% of its SUNDARAM FINANCE Nifty 50 customers opted for moratorium last year, lowest within its peer set. It has restructured accounts worth 4.1% of advances until Feb’2021. Price Performance (%) Strong capital allocation and return ratios: SUF has not raised any capital over the last 1 M 6 M 1 Yr 4 decades and have built all businesses organically. Its avg. ROA’s has been consistent between 2.3-2.5% and ROE’s hovered in the range of 14-16% due to low leverage levels. SUF 6.5 40.6 101.0 Nifty Index 5.1 16.9 65.8 Y/E March (Rs mn) FY19 FY20 FY21E FY22E FY23E Source: Bloomberg NII 11,754 13,344 14,837 16,147 17,677 PPOP 10,026 12,315 14,278 14,902 16,011 PAT 5,936 7,239 8,309 9,941 10,759 Loans 2,72,715 2,80,447 3,04,512 3,21,700 3,69,560 RoA (%) 2.1 2.3 2.4 2.7 2.6 RoE (%) 12.9 13.7 14.1 15.0 14.5 P/ABV 5.6 5.4 4.7 4.1 3.6 Source: Company, Nirmal Bang Institutional Equities Research
Institutional Equities
Investment Arguments Largest beneficiary of pick-up in CV demand SUF has 6 decades of experience in vehicle financing with strong penetration in the South. With a presence across diverse products, its primary focus is on financing of CV’s and cars. CV financing contributed 51% (avg.) of AUM over the last 8 years. Naturally, there is a strong correlation between the growth in CV segment and growth in SUF’s disbursements. The industry CV volume growth has been in negative territory for 7 quarters before registering a growth in 4QFY21. Only once in last 64 quarters the CV growth has been in a negative territory for over 7 quarters in a row. We believe the replacement cycle to pick-up once the economic activity revives to normalcy. The increase in prices on BS VI transition should further aid in disbursements growth. Exhibit 1: AUM Mix – segment wise Exhibit 2: AUM mix – region wise
4 3 3 4 4 5 4% 4% 3% 3% 4% 4% 4% 4% 100 5 9 100% 5 4 3 4 5 5 12% 7 7 7 13% 13% 14% 13% 13% 13% 12% 7 8 10 11 7 80 11 11 80% 17% 19% 19% 20% 19% 19% 21% 21% 31 31 25 60 37 29 25 25 40 60% 40 40% 20 44 49 56 53 52 54 52 48 20%
0 63% 64% 63% 67% 65% 66% 62% 62%
0%
FY19 FY15 FY16 FY17 FY18 FY20
FY14 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21 3QFY21 CVs Cars CE Tractors Others South North West East Source: Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research The share of CV disbursements has largely remained around 50% historically; however, we have seen a change in trend in 9MFY21 with share of CV disbursements declining to 30%. Strong end market led to increase in share of cars, CE and tractor disbursements. Interestingly, we also see an increase in the share of Northern geography, indicating an effort to diversify its geographical presence. Exhibit 3: Disbursement mix – segment wise Exhibit 4: Disbursement mix – region wise
4% 3% 3% 4% 4% 5% 5% 4% 4% 3% 3% 4% 4% 100% 100% 4% 5% 5% 4% 3% 4% 5% 7% 5% 7% 16% 14% 13% 13% 12% 10% 7% 7% 8% 10% 13% 13% 13% 11% 11% 80% 13% 80% 17% 19% 19% 19% 20% 19% 21% 31% 14% 27% 60% 31% 25% 60% 37% 29% 25% 40%
40% 28% 40%
20% 20% 44% 49% 56% 53% 52% 54% 52% 30% 63% 64% 63% 67% 65% 66% 62% 58% 0% 0% FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21 FY14 FY15 FY16 FY17 FY18 FY19 FY20 9MFY21 South North West East CVs Cars CE Tractors Others Source: Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research
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Institutional Equities
Exhibit 5: Disbursements growth strongly related to CV growth
YoY growth 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 MHCV industry (Vol.) LCV industry (Vol.) SUF disbursement (Rs) Source: Nirmal Bang Institutional Equities Research
Exhibit 6: Conservative lending in CV’s observed in 9MFY21
YoY growth
40% 30% 31% 25% 19% 16% 16% 13% 17% 15% 14% 20% 7% 9% 0% 0% 0%
-20% -12% -15% -20% -40% -30% -42% -60% -55% -61% -80% FY15 FY16 FY17 FY18 FY19 FY20 9MFY21
MHCV industry (Vol.) LCV industry (Vol.) SUF CV disbursement (Rs)
Source: Nirmal Bang Institutional Equities Research
Exhibit 7: CV demand to revive with pick-up in mfg. growth and.. Exhibit 8: ..increase in mining and quarrying activities
20 60.0 20 60.0 15 15 45.0 45.0 10 30.0 10 30.0 5 5 15.0 0 15.0 -5 0 - - -10 (15.0) -5 (15.0) -15
-20 (30.0)
-10 (30.0)
FY12 FY06 FY07 FY08 FY09 FY10 FY11 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Manufacturing growth (%) CV Vol. growth (%, RHS) Mining & Quarrying CV Vol. growth (%, RHS)
Source: Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research
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Institutional Equities
We witness some near term challenges with the onset of second wave of Covid. The decline in fleet utilization levels, freight rates and increase in diesel prices are likely to weigh on borrower sentiments over near term. We saw a good recovery in freight rates with operators being in a position to pass on increase in fuel costs. However, our channel checks suggest that the utilization levels have come down to 30% in May vs 80-85% in March’21 and 50% in April’21. The large fleet operators expect the utilizations to remain subdued until Aug-Sept’21.
We studied truck orders in North America, which surged despite going through three-waves of pandemic due to government infra push. In India, CV industry was in a negative territory for 7 consecutive quarters before growing 43% in 4QFY21. Government’s emphasis on PLI (manufacturing), infrastructure development and replacement demand may aid in recovery in CV sales from July-Aug’21 onwards.
Exhibit 9: North America class 8 orders at all time high despite three waves of pandemic
250% 200% 150% 100% 50% 0% -50% -100%
-150%
Q4FY14 Q3FY18 Q3FY19 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q4FY18 Q1FY19 Q2FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 North America class 8 orders India CV Sales - Goods & Buses
Source: Nirmal Bang Institutional Equities Research, Industry
Exhibit 10: Diesel prices have inched upwards…. Exhibit 11: ..however operators have been able to pass on increase in fuel prices until March
140 70.0
130 60.0
120 50.0
110 40.0
100 30.0
90 20.0
80 10.0
0.0
70
Jul/14 Jul/15 Jul/16 Jul/17 Jul/18 Jul/19 Jul/20
Jul/14 Jul/15 Jul/16 Jul/17 Jul/18 Jul/19 Jul/20
Oct/14 Oct/15 Oct/16 Oct/17 Oct/18 Oct/19 Oct/20
Apr/14 Apr/15 Apr/16 Apr/17 Apr/18 Apr/19 Apr/20
Jan/15 Jan/16 Jan/17 Jan/18 Jan/19 Jan/20 Jan/21
Apr/19 Apr/14 Oct/14 Apr/15 Oct/15 Apr/16 Oct/16 Apr/17 Oct/17 Apr/18 Oct/18 Oct/19 Apr/20 Oct/20
Jan/19 Jan/21 Jan/15 Jan/16 Jan/17 Jan/18 Jan/20 Indexed average freight rates Indexed diesel prices Absolute contribuion of freight rates over diesel costs Source: Nirmal Bang Institutional Equities Research, Crisil Source: Nirmal Bang Institutional Equities Research, Crisil
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Institutional Equities
Measured profitable growth SUF has been able to grow its AUM by 10% over the last 5/10 years while disbursements have registered a CAGR of 9%/10% over the same period. SUF has calibrated its strategy in line with market conditions and has not hesitated to curtail lending in times of heightened stress. Growth has lagged peers due to single minded focus on asset quality over growth. It has been able to maintain high RoA’s and mid-teen RoE’s across cycles. Around 60% of SUF’s customers are repeat customers with strong credit records as reflected in industry leading asset quality.
Exhibit 12: Peer AUM growth 5/10 years Exhibit 13: Peer disbursement growth 5/10 years Disbursement growth AUM growth 30% 25% 24% 22.0% 25% 22% 20% 18.0% 19% 17.0% 20% 14% 15% 15% 13.4% 13.0% 15% 13% 13% 12.0% 9.9% 9% 10% 10% 7.0%
5% 5%
0% 0% SUF CIFC SHTF MMFS SUF CIFC SHTF MMFS 5Y CAGR 10Y CAGR 5Y CAGR 10Y CAGR Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Note: 5 year/10 year CAGR is calculated as on FY20, as FY21 was Disproportionately impacted due to COVID
Exhibit 14: AUM Mix Auto AUM Mix - FY21 CIFC SHTF* MMFS SUF# HCV 9.90% 47.50% 48.00% LCV 21.30% 24.70% 16.00% Construction Equipment 6.20% - 11.00% Car & MUV 17.40% 21.00% 22.00% 25.00% - UV - - 30.00%
Tractors 10.00% 2.70% 17.00% 7.00% 3W & SCV 1.10% - - - Older vehicles 27.30% 89%* 9.00% - 2W 4.40% - - - VF AUM/total AUM 72.00% 95.90% - - Other segments 28.00% 4.10% 6.00% 9.00% Source: Nirmal Bang Institutional Equities Research, NBFC Note: *Older vehicles and other vehicle types overlap for SHTF; older vehicles is 87% of AUM portfolio #SUF AUM break-up is as on Q3FY21
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Exhibit 15: SUF has low share of high & medium yield Exhibit 16:..reflected in low interest yields
segments (%)…
100 18%
16.4% 16.3% 15.7% 16.4%
16.7% 15.8%
15.2%
16.4%
14.8% 15.0%
16% 14.6% 14.7% 80
14% 12.7%
12.3%
12.3% 11.9% 12% 60 10% 8% 40 6% 4% 20 2%
0 0% SUF CIFC SHTF MMFS SUF CIFC SHTF MMFS High yield Medium yield Low yield FY18 FY19 FY20 FY21* Source: Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research, NBFC
Exhibit 17:..however low cost of funds and… Exhibit 18:..low credit costs led to…
9.3% 10% 9.1% 9.0% 8.5% 7.0% 8.7% 8.8% 8.6% 6.0% 9% 7.7% 8.7% 8.2% 7.9% 8.2% 7.7% 8.0% 6.0% 8% 7.6% 7.4% 7% 5.0% 6% 4.0% 3.0% 3.3% 5% 3.0% 2.5%2.8% 4% 2.0% 2.2% 3% 2.0% 1.7% 1.3% 1.1%1.0% 1.1% 1.2% 2% 0.5% 0.7% 1.0% 0.5% 1% 0% 0.0% SUF CIFC SHTF MMFS SUF CIFC SHTF MMFS
FY18 FY19 FY20 FY21* FY18 FY19 FY20 FY21*
Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Exhibit 19:..strong and stable RoA’s for SUF
3.0% 2.8% 2.8% 2.6% 2.5% 2.5% 2.4% 2.5% 2.3% 2.3% 2.2% 2.3% 2.1% 2.1% 2.0% 2.0% 1.7%
1.5% 1.3%
1.0%
0.5% 0.4%
0.0% SUF CIFC SHTF MMFS
FY18 FY19 FY20 FY21*
Source: Nirmal Bang Institutional Equities Research, NBFC *Note: SUF 9MFY21 PAT annualized for the year
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Exhibit 20: RoE’s are low… Exhibit 21:..due to low leverage
10.0 20% 18.2% 8.5 17.0% 17.7% 7.9 16.3% 15.7% 8.0 15.0% 6.4 6.7 6.5 6.3 15% 14.0% 5.7 6.1 6.0 10.9% 10% 4.0
2.0 5% 0.0 0% SUF CIFC SHTF MMFS SUF CIFC SHTF MMFS Leverage (x) (5Y avg) Leverage (x) (10Y avg) Avg. RoE for 5 years Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC Note: 5year average over FY16-20; 10year average over FY11-20
Exhibit 22: GNPA low across cycles due to strong underwriting Exhibit 23: … high proportion of repeat customers practices & ..
9.0% 8.3% 70% 8.1% 60% 8.0% 60% 7.0% 6.3% 50% 5.7% 6.0% 40% 5.0% 30% 30% 30% 4.0% 3.6% 20% 2.8% 3.0% 20% 1.7% 2.0% 1.4% 10% 1.0% 0% 0.0% SUF CIFC SHTF MMFS SUF CIFC SHTF MMFS Repeat customers 5Y avg 10Y avg Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research Note: 5year average over FY16-20; 10year avg over FY11-20
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Exhibit 24: Moratorium opted lowest amongst the peers Exhibit 25: Restructuring highest likely due to ~50% share of CV’s in AUM
100% 94% 4.5% Restructuring as on 4QFY21 4.0% 4.0% 80% 76% 75% 64% 3.5% 60% 3.0% 2.5% 2.1% 40% 2.0% 1.5% 20% 1.0% 0.5% 0.5% 0.1% 0% 0.0% SUF CIFC SHTF MMFS SUF* CIFC SHTF MMFS Customers installments under moratorium Restructuring as on 4QFY21 Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC Note: SUF – as in Feb 2021 (Rating rationale – ICRA, March 19, 2021)
Exhibit 26: Strong liability franchise Exhibit 27: Well managed ALM profiles
Commecial Q3FY21 papers 45% ALM Mismatch 8% 40% Deposits 13% 35% 30% 25% 20% Debentures Bank 50% 15% Borrowings 10% 18% 5% 0% -5% FY17 FY18 FY19 FY20 Securitisation 1Y 1Y-3Y 3Y-5Y >5Y 11% Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC Note: Bank loans include term loans, CP’s and demand loans
Exhibit 28: Branch expansion has lagged players Exhibit 29: SUF closed down un-profitable branches in recent periods
2000 40 35 35 30 22 19 16 1600 20 12 13 10 1200 0 -10 800 -20 -30 -21 -27 -40 400 -50
-60 -49
0
SUF CIFC SHTF MMFS
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 3QFY21 New branch additions FY18 FY19 FY20 3QFY21 Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
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Exhibit 30: Branch network - geography Exhibit 31: Pan India branch map
East 7% West 11%
South North 55% 27%
Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
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Financials – measured growth with strong returns
Exhibit 32: We build 30.6% CAGR in disbursements over Exhibit 33:..translating into 9.6% AUM CAGR FY21E-23E..
250 50% 41% 450 25 20.4 200 40% 400 350 20 150 30% 16.1 21% 15.9 18% 300 14.1 15% 100 14% 20% 12.1 15 10% 250 10.0 50 6% 10% 200 100 97 100 114 132 156 172 152 129 182 220 8.0 10 0 0% 150 5.3 -12% 100 3.6 3.6 3.3 5 -50 -15% -10% 50 151 157 163 179 207 250 290 299 323 341 388
-100 -20%
0 0
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
FY21E FY22E FY23E
FY23E FY21E FY22E Disbursement (Rs bn) YoY growth (RHS) AUM (Rs bn) YoY growth (RHS)
Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Exhibit 34: NIMs to improve with reduction in cost of funds Exhibit 35: Cost to income ratio to increase with branch expansion
14.0% 12.7% 45% 11.9% 12.3% 12.2% 12.3% 12.4% 38.0% 39.4% 12.0% 40% 33.6% 33.6% 35% 32.7% 10.0% 30.1% 7.9% 7.7% 7.6% 7.4% 7.5% 7.7% 30% 8.0% 25% 6.0% 20% 15% 4.0% 5.6% 5.1% 5.2% 5.1% 4.8% 4.8% 10% 2.0% 5% 0.0% 0% FY18 FY19 FY20 FY21E FY22E FY23E FY18 FY19 FY20 FY21E FY22E FY23E
Interest yields Cost of funds NIMs on loans Cost to income ratio
Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Exhibit 36: Credit costs to normalize from FY22 onwards Exhibit 37: We expect PCR to remain low due to strong asset quality
1.2% 1.1% 1.1% 3.0% 64% 65% 70% 56% 60% 1.0% 2.5% 49% 0.8% 50% 2.0% 38% 0.8% 38% 35% 35% 0.6% 31% 40% 0.6% 0.5% 1.5% 0.5% 0.5% 0.5% 0.5% 30% 1.0% 0.4% 20% 0.5% 0.2% 10% 0.0% 0% 0.0% FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E GNPA NNPA PCR Credit costs Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
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Exhibit 38: RoE & RoA set to improve Exhibit 39: Adequately capitalised
18% 25% 15.2% 15.0% 4.2% 14.0% 14.3% 14.1% 14.5% 15% 13.7% 4.8% 4.6% 12.9% 20% 3.6% 4.2% 3.5% 5.5% 5.2% 4.7% 12% 15% 9% 10% 6% 2.8% 2.7% 2.5% 2.7% 2.6% 2.1% 2.3% 2.4% 5% 3% 17.2% 14.8% 14.3% 12.2% 14.7% 13.2% 13.8% 14.5% 14.2% 0% 0% FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E RoA RoE Tier I Tier II Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC Exhibit 40: Summary background of SUF, CIFC, SHTF & MMFS FY20 SUF CIFC SHTF MMFS Size
AUM (Rs mn) 2,99,360 6,05,490 10,97,492 6,49,930 Disbursement (Rs mn) 1,51,750 2,90,900 4,76,912 4,23,882 Core product segment CV LCV Used CV Tractors & UV Operations
Branches 610 1,091 1,758 1,322 Employees 6260 26,558 28,045 21,862 AUM/branch (Rs mn) 491 555 624 492 AUM/Employee (Rs mn) 48 23 39 30 Employee/Branch 10 24 16 17 More Branch More Branch Underwriting model Centralised More Branch driven driven driven 5Y Opex to NII (avg) 38.0% 39.7% 24.8% 38.8% 10Y Opex to NII (avg) 37.5% 44.2% 26.4% 36.4% Growth
5Y Disbursement CAGR (FY15-20) 8.7% 18.0% 7.0% 12.0% 10Y Disbursement CAGR (FY10-20) 9.9% 22.0% 13.0% 17.0% 5Y AUM CAGR (FY15-20) 13.4% 19.0% 13.0% 15.0% 10Y AUM CAGR (FY10-20) 13.1% 24.0% 14.0% 22.0% Asset Quality
5Y GNPA (avg) 1.7% 3.6% 8.1% 8.3% 10Y GNPA (avg) 1.4% 2.8% 5.7% 6.3% 5Y write-off (avg) 0.4% 0.8% 2.0% 2.3% 5Y Credit cost (avg) 0.6% 1.3% 3.0% 2.4% 10Y Credit cost (avg) 0.6% 1.3% 2.9% 2.1% Return Ratios
5Y RoA 2.5% 2.3% 2.2% 1.7% 10Y RoA 2.7% 2.0% 2.7% 2.6% 5Y RoE 14.0% 18.2% 15.0% 10.9% 10Y RoE 17.0% 16.3% 17.7% 15.7% Source: Nirmal Bang Institutional Equities Research, NBFC
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Key Subsidiaries & JV’s SUF has presence in housing finance, asset management and general insurance through its subsidiaries Sundram Housing Finance Ltd (SHFL), Sundaram Asset Management company & JV Royal Sundaram General Insurance Co. Ltd.
Sundaram Housing Finance Ltd SUF started housing finance business in 1999 as a JV with BNP Paribas Personal finance. SUF acquired 49.9% equity stake held by BNP Paribas, in Sundaram BNP Paribas Home Finance Ltd for a consideration of Rs 999.7 crores. Consequently, SHFL became a wholly owned subsidiary of SUF w.e.f. 30th Sept 2019.
Exhibit 41: AUM grew at 5% CAGR over FY15-20 Exhibit 42: Disbursement growth has been slow at 2% CAGR over FY15-20
120 10% 30 80%
100 8% 25 60% 6% 80 20 40% 4% 60 15 20% 2% 40 10 0% 0% 20 -2% 5 -20% 75 75 77 84 91 95 92 95 103 19 17 18 26 24 21 14 22 26 - -4% - -40% FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E
AUM (Rs bn) YoY growth (RHS) Disbursements (Rs bn) YoY growth
Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Exhibit 43: Portfolio mix has largely remained constant Exhibit 44: NIMs likely to remain at FY21E levels
100% 14.0 12.0 80% 31.9% 31.0% 31.0% 31.2% 31.2% 30.3% 10.0 60% 8.0
40% 6.0 4.0 20% 68.1% 69.0% 69.0% 68.8% 68.9% 69.7% 2.0 0% - FY15 FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Housing Non-housing Interest yield (%) CoF (%) NIM (%)
Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Exhibit 45: Credit costs sub 1% levels Exhibit 46: GNPA & NNPA
0.9 0.8 4.0% 3.8% 0.8 3.5% 3.3% 2.8% 2.9% 3.0% 0.7 0.6 0.6 3.0% 0.6 2.5% 2.5% 0.5 2.0% 0.4 1.6% 1.3% 0.3 0.2 0.2 1.5% 1.0% 1.0% 0.9% 0.2 1.0% 0.8% 0.1 0.5% - 0.0% FY16 FY17 FY18 FY19 FY20 FY15 FY16 FY17 FY18 FY19 FY20 Credit costs (%) GNPA NNPA Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
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Exhibit 47: Well diversified borrowing mix Exhibit 48: Geographical presence East North Borrowing mix West 2% 1% NHB 2% Refinance Debentures 21% 23%
CP 9%
South Term loans 95% Deposits 28% 19% Source: Nirmal Bang Institutional Equities Research, NBFC Source: Nirmal Bang Institutional Equities Research, NBFC
Sundaram Asset Management
SUF has ~25 years of experience in asset management business through its 100% subsidiary Sundaram AMC. It has an avg. AUM of Rs 355 bn with 72% exposure in equity-oriented schemes and ~28% in debt schemes. SUF is in the process of acquisition of asset management businesses of Principal Asset Management for a consideration of Rs. 3.4bn and has received regulatory approval of CCI. As per the agreement, Sundaram will acquire the schemes managed by Principal and 100% share capital of Principal Asset, Principal Trustee Company and Principal Retirement Advisors. Principal AMC has assets under management of Rs ~78bn as on March 31, 2021, with about 90% exposure in equity oriented schemes. The acquisition is priced reasonably at 4.4x Principal’s AUM size.
Sundaram AMC’s AAUM size has increased at 10% over FY15-20, while revenues grew at a CAGR of 15% over the same period. The share of equity oriented schemes went up from 37% in FY15 to 72% in FY21, resulting into high growth in revenues. While, Sundaram AMC is more of a mid and small cap fund house, acquisition of Principal will aid it in being a much more broad based large, small & mid-cap fund house.
Exhibit 49: Key financial & operational data FY15 FY16 FY17 FY18 FY19 FY20 9MFY21
Average AUM 19,511 22,169 28,312 35,982 34,384 33,927 35,512 Debt 63 58 61 49 38 34 28 Equity 37 42 39 51 62 66 72 Revenues 146.8 228.1 257.3 337.1 329.8 293.9 NA PAT 22 4 31 31 29 33 32 Employees 274 284 306 328 354 367 367 Retail investors 8,91,734 9,32,882 9,91,752 11,22,438 11,87,512 10,87,296 10,54,488 Source: Nirmal Bang Institutional Equities Research, NBFC
Royal Sundaram General Insurance
Royal Sundaram General Insurance is a JV between Sundaram Finance and Ageas Insurance International N.V., where each holds 50% and 40% share respectively. The remaining 10% share is held by Indian promoters (Sundaram family). Ageas bought 25.9% stake from Sundaram finance for Rs 9.84bn in FY19, valuing the total business at Rs 38bn. Sundaram finance had acquired 26% stake in Royal Sundaram from RSA group, UK in FY16 for a consideration of Rs 4.5 bn. Gross written premium increased from Rs 15.7bn in FY15 to Rs 37.1bn in FY20, registering a CAGR of 19% over last 5 years.
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Valuations
SUF is currently trading at 3.9x 12-m forward P/ABV vs a 5-yr avg 12m fwd P/ABV of 3.4x. We value the standalone business at 3.75x, in line with CIFC, which has a less cyclical business model. We initiate with an Accumulate rating and a PT of Rs 2,374 (2% downside). We believe that the increase in CV sales and its impact on earnings is fully priced in and thereby the upside remains limited. We value standalone business at Rs 1,848 per share (3.75x P/ABV), and other businesses at Rs 526 (per share) after 20% holding company discount. Exhibit 50: SOTP Valuation
Value per Entity Valuation Method share (Rs)
3.75x FY23E P/ABV adjusted for subsidiaries cost of Sundaram Finance (Standalone) 1,848 investment Sundaram Home Finance (Subsidiary) 1.5x FY23E Networth 251 Sundaram Asset Management (Subsidiary) 5% of last reported AUM 195 Royal Sundaram (General Insurance JV) Valued on last transaction basis 171
Other subsidiaries & Associates Net worth of other investments on 3QFY21 basis 41
20% holding company discount 132 Target Price 2,374 CMP 2,422 Upside/(Downside) -2.0% Source: Nirmal Bang Institutional Equities Research, NBFC Note: We incorporate Principal MF’s AUM of Rs78bn in the valuation of Sundaram Asset Management Exhibit 51: SUF – 12 month fwd. P/B
5.0x avg+ 2st dev. 4.5x 4.0x avg+ 1st dev. 3.5x Avg. 3.0x 2.5x avg- 1st dev. 2.0x avg- 2st dev. 1.5x 1.0x 0.5x
0.0x
Mar/21 Mar/13 Mar/14 Mar/15 Mar/16 Mar/17 Mar/18 Mar/19 Mar/20
SUF- P/B
Source: Nirmal Bang Institutional Equities Research, Bloomberg
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Exhibit 52: SUF – 12 month fwd. P/B adjusted
5.0x avg+ 2st dev. 4.5x avg+ 1st dev. 4.0x
3.5x Avg. 3.0x avg- 1st dev. 2.5x 2.0x avg- 2st dev. 1.5x 1.0x 0.5x
0.0x
Mar/19 Mar/13 Mar/14 Mar/15 Mar/16 Mar/17 Mar/18 Mar/20 Mar/21
SUF- P/B adj.
Source: Nirmal Bang Institutional Equities Research, Bloomberg
Exhibit 53: Peer Valuation table
Price Market cap P/B P/B- adj. P/E ROE ROA Rating Name Rs. Rs. (billion) FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E FY21 FY22E FY23E
CIFC 544 446 Accumulate 4.7x 3.9x 3.3x 5.6x 4.5x 3.7x 29.4x 20.5x 17.5x 17.1% 20.6% 20.2% 2.2% 2.7% 2.8%
SHTF 1411 357 Buy 1.7x 1.5x 1.3x 2.1x 1.9x 1.7x 14.0x 10.8x 9.5x 12.6% 14.4% 14.5% 2.0% 2.5% 2.6%
MMFS 154 191 Accumulate 1.3x 1.2x 1.1x 1.5x 1.3x 1.2x 57.7x 10.7x 8.2x 2.5% 11.5% 14.0% 0.4% 2.2% 2.6%
SUF 2422 269 Accumulate 4.3x 3.8x 3.4x 4.7x 4.1x 3.6x 32.4x 27.1x 25.0x 14.1% 15.0% 14.5% 2.4% 2.7% 2.6% Source: Nirmal Bang Institutional Equities Research, Bloomberg
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About Sundaram Finance Sundaram finance, the flagship company of the TS Santhanam arm of TVS group, is one of the oldest retail financing NBFCs. It has a presence across 583 branches in India. The product mix is diversified with primary focus on financing of commercial vehicles and cars. The company through its various subsidiaries and JV’s, has presence across multiple housing finance, general insurance and Asset Management Company. It demerged its non-financial services investments in automotive and manufacturing business into a separate company.
SUF’s management has not raised any capital over last 4 decades and is unlikely to do so in future as well. It has delivered stable and profitable growth across business cycles. SUF calibrates its growth strategy in line with market conditions and has not hesitated to curtail lending in times of heightened stress. The expansion in other businesses in the BFSI space has been done through judicious use of internally generated capital. Recently, the company acquired Principal MF for Rs 3.4bn (valued at ~4.4% of AUM).
Exhibit 54 : Subsidiaries, Joint Ventures & Subsidiary
Source: Nirmal Bang Institutional Equities Research, NBFC
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Board of Directors and Key Management Personnel S Viji Non-executive Chairman Harsha Viji Executive Vice Chairman S Ram Non-Executive Director S Ravindran Non-executive Director T.T. Srinivasraghavan Non-executive Director P N Venkatachalam Independent Director S Mahalingam Independent Director S Prasad Independent Director Shobhana Ramachandran Independent Director R Raghuttama Rao Independent Director Rajiv C Lochan Managing Director A N Raju Deputy Managing Director M. Ramaswamy Chief Financial Officer
Key Shareholders Institutional shareholding Shareholding pattern
Domestic MF % of shares
Axis Mutual Fund 3.67
Insurance Companies Promoters Non Insti 36% 40% United India Insurance Co. Ltd 1.41
HDFC Life Insurance Co. Ltd 1.82
FPI Employee FIIs benefit trust 13% Pari Washington Co. Pvt Ltd 1.68 1% Domestic insurance Co's Domestic MF's 6% Nalanda India Equity Fund 3.78 4%
Source: BSE, Nirmal Bang Institutional Equities Source: BSE, Nirmal Bang Institutional Equities
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Financials
Exhibit 55: Income statement Exhibit 57: Key ratios Y/E March (Rs mn) FY9 FY20 FY21E FY22E FY23E Y/E March (%) FY9 FY20 FY21E FY22E FY23E Financing Income 29,379 34,064 35,683 38,512 42,858 Spreads Analysis
Finanancing charges 17,625 20,720 20,845 22,365 25,182 Avg. Yield 11.9 12.3 12.2 12.3 12.4 Net Financing income 11,754 13,344 14,837 16,147 17,677 Avg Cost of funds 7.6 7.9 7.4 7.5 7.7 Change (%) 12.2 13.5 11.2 8.8 9.5 NIMs 4.8 4.8 5.1 5.2 5.1 Other Income 4,803 5,205 5,589 6,005 6,454 Int Spread 4.3 4.4 4.8 4.8 4.8 Net Income 16,557 18,549 20,427 22,152 24,131
Change (%) 9.7 12.0 10.1 8.4 8.9 Profitability Ratios (%)
Employee Cost 3,224 3,586 3,766 4,217 4,723 RoE 12.9 13.7 14.1 15.0 14.5 Other Operating Exp. 3,306 2,648 2,383 3,032 3,396 RoA 2.1 2.3 2.4 2.7 2.6 Operating Profit 10,026 12,315 14,278 14,902 16,011 Int. Expended/Int.Earned 60.0 60.8 58.4 58.1 58.8 Change (%) 7.2 22.8 15.9 4.4 7.4 Other Inc./Net Income 29.0 28.1 27.4 27.1 26.7 Total Provisions 1,073 2,864 3,174 1,619 1,634
% to operating income 10.7 23.3 22.2 10.9 10.2 Efficiency Ratios (%)
PBT 8,953 9,451 11,104 13,284 14,377 Op. Exps./Net Income 39.4 33.6 30.1 32.7 33.6 Tax 3,017 2,212 2,795 3,343 3,618 Empl. Cost/Op. Exps. 49.4 57.5 61.2 58.2 58.2 Tax Rate (%) 33.7 23.4 25.2 25.2 25.2
PAT 5,936 7,239 8,309 9,941 10,759 Asset-Liability Profile (%) Change (%) 5.3 22.0 14.8 19.6 8.2 Loans/Borrowings Ratio 109.1 102.6 105.0 105.0 105.0 Exceptional items 5,327 - - - - GNPA 3,670 7,881 8,815 7,496 6,559 Reported PAT 11,263 7,239 8,309 9,941 10,759 NNPA 2,286 5,414 5,465 4,872 4,264 Dividend 1,944 1,444 1,662 1,988 2,152 GNPL ratio (%) 1.3 2.5 2.9 2.3 1.8 Source: Company, Nirmal Bang Institutional Equities Research NNPL ratio (%) 0.8 1.7 1.8 1.5 1.1 Leverage 6.1 6.0 5.8 5.5 5.6 Exhibit 56: Balance sheet Average leverage (on BS) 6.2 6.0 5.9 5.6 5.5 Y/E March (Rs mn) FY9 FY20 FY21E FY22E FY23E CAR 19.5 18.4 18.5 19.1 18.5 Capital 1,111 1,111 1,111 1,111 1,111 Source: Company, Nirmal Bang Institutional Equities Research Reserves & Surplus 49,327 54,363 61,010 68,963 77,570 Net Worth 50,438 55,474 62,121 70,074 78,681 Exhibit 58: Valuations Borrowings 2,50,058 2,73,367 2,90,011 3,06,381 3,51,962 Valuations FY9 FY20 FY21E FY22E FY23E Change (%) 18.5 9.3 6.1 5.6 14.9 BVPS (INR) 454 499 559 631 708 Other Liabilities 5,996 5,354 6,692 7,696 8,851 BV Growth (%) 22.0 10.0 12.0 12.8 12.3 Total Liabilities 3,06,492 3,34,195 3,58,825 3,84,151 4,39,493 Price-BV (x) 5.3 4.9 4.3 3.8 3.4 Investments 18,663 39,377 41,346 43,414 45,584 Adjusted BV per share 433.4 450.6 509.9 586.9 669.8 Change (%) (15.4) 111.0 5.0 5.0 5.0 P/ABV 5.6 5.4 4.7 4.1 3.6 Loans 2,72,715 2,80,447 3,04,512 3,21,700 3,69,560 EPS (INR) 53.4 65.2 74.8 89.5 96.8 Change (%) 23.9 2.8 8.6 5.6 14.9 Growth (%) 5.3 22.0 14.8 19.6 8.2 Net Fixed Assets 2,254 2,807 2,947 3,095 3,250 Price-Earnings (x) 45.3 37.2 32.4 27.1 25.0 Net Current Assets 12,859 11,564 10,019 15,943 21,099 Dividend 12.0 17.5 13.0 15.0 17.9 Total Assets 3,06,492 3,34,195 3,58,825 3,84,151 4,39,493 Dividend Yield (%) 0.5 0.7 0.5 0.6 0.7 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research
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DISCLOSURES
This Report is published by Nirmal Bang Equities Private Limited (hereinafter referred to as “NBEPL”) for private circulation. NBEPL is a registered Research Analyst under SEBI (Research Analyst) Regulations, 2014 having Registration no. INH000001436. NBEPL is also a registered Stock Broker with National Stock Exchange of India Limited and BSE Limited in cash and derivatives segments.
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