Sundaram Finance (SUNFIN)

CMP: | 1655 Target: 1920 (16%) Target Period: 12 months BUY

November 19, 2019 Steady performance continues... Sundaram Finance (SFL) is a -based NBFC with interests in asset financing, home finance & asset management. Major value is derived from asset financing (vehicle financing) with AUM of | 30256 crore (65% is Particulars derived from southern India) as on Q2FY20. For FY19 and H1FY20, PAT was

at | 534 crore and | 427 crore, respectively. Update Market Capitalisation | 18622 crore Steady performance; AUM growth to improve, going ahead GNPA (Q2FY20) | 666 crore NIM (FY19) 6.6% Given the slowdown in auto volumes, liquidity crisis, the business 52 week H/L 1745 /1320

Company Company environment remained tough. However, SFL has been able to outperform Face value | 10 its peers on the back of stable asset quality & steady margins, though growth DII Holding (%) 11.1 has moderated from a peak of ~40% in FY18 to 11% in Q2FY20. Going FII Holding (%) 8.0 ahead, we expect loan growth of 10% CAGR for FY19-21E to | 33871 crore.

During H1FY20, disbursement remained flat at | 8246 crore vs. | 8374 crore Key Highlights in H1FY19. Accordingly, AUM growth moderated to 11% YoY to | 30256 crore. On the liability front, strong parentage and business model has  Stable margins & asset quality aided enabled smooth borrowing. Asset quality has been steady QoQ with GNPA the company to maintain profitability & NNPA ratio at 2.2% & 1.64%, respectively. Led by steady NII of | 884 crore  Maintain BUY with target price of & lower operational expense of | 294 crore in H1FY20, SFL reported | 1920 per share operating profit of | 657 crore, up 35% YoY. Reduction in tax rate led to

earnings at | 427 crore, though partly offset by marginally higher provisions. Price Chart 14,000 2,000 Subsidiaries’ performance muted 12,000 10,000 1,500 SFL’s major subsidiaries & JV include housing finance company, AMC, 8,000 general . The HFC’s AUM is at | 9090 crore (70% home loans, 30% 1,000 6,000 LAP). Asset quality has improved with GNPA ratio down 70 bps YoY to 4,000 3.14%. Other subsidiaries like AMC and general insurance are performing 500 2,000 well. The AMC business has AUM of | 33588 crore (down 5% YoY) of which

0 0

Oct-16 Feb-17 Jun-17 Jun-18 Oct-18 Mar-19 Oct-17 Feb-18 Jul-19 Nov-19

65% is equity. In general insurance, gross written premium in H1FY20 was

| 1821 crore (up 4% YoY) with loss of | 16 crore vs. profit of | 47 crore in Research Equity Retail

H1FY19. During the quarter, the company acquired 49% & 49.9% stake in – Sundaram BNP Fund services & Sundaram BNP Home Finance. Sundaram (R.H.S) Nifty (L.H.S)

Valuation & Outlook On back of a strong & conservative management, SFL commands premium Research Analyst valuation compared to its peers. The ongoing slowdown & liquidity crisis Kajal Gandhi has impacted growth though it has not impacted SFL’s borrowing capability. [email protected]

ICICI Securities Securities ICICI With expected revival of auto sector in FY21E & factoring high RoAs, RoE Vishal Narnolia revival & stable margins, we expect PAT growth of 38% CAGR in FY19-21E [email protected] to | 807 crore. Given near term headwinds, we lower our target price to | 1920 (earlier 2050), valuing standalone business at 2.5x FY21E ABV & adding Harsh Shah | 497 for subsidiaries post 15% holding company discount. Maintain BUY. [email protected] Key Financial Summary FY17 FY18 FY19 H1FY20 NII (| crore) 891 1460 1635 884 PPP (| crore) 782 935 1003 657 PAT (| crore) 495 563 534 427 BV (|) 337.1 372.1 454.0 478.2 EPS (|) 44.6 50.7 48.1 38.4 P/E (x) 37.0 32.5 34.3 43.0 P/BV (x) 4.9 4.4 3.6 3.5 RoA (%) 2.7 2.2 1.8 1.3 RoE (%) 13.2 13.6 10.6 8.0 s Source: Company, ICICI Direct Research Company Update | Sundaram Finance ICICI Direct Research

Exhibit 1: Moderation in disbursement witnessed Disbursment (| crore) H1FY19 H2FY19 FY19 H1FY20 CV 4505 4715 9220 4585 Car 2211 2013 4224 1938 Construction equipment 913 1010 1923 882 Tractors 402 508 910 437 Others 343 550 893 404

Total 8374 8796 17170 8246 Source: Company, ICICI Direct Research

Exhibit 2: Auto slowdown impacting AUM growth AUM (| crore) H1FY19 FY19 H1FY20 CV 13306 15217 16157 Car 7140 7507 7625 Construction equipment 2272 2811 2995 Tractors 1348 1536 1634 Others 899 1913 1846

Total 24964 28984 30256 Source: Company, ICICI Direct Research

Exhibit 3: Asset quality marginally moderated 2.5 2.2 2.2

2 1.79 1.79 1.33 1.5 1.63 1.64 1 1.2 1.22 0.5 0.83

0 01-09-2018 01-12-2018 01-03-2019 01-06-2019 01-09-2019

GNPA NNPA

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2 Company Update | Sundaram Finance ICICI Direct Research

Exhibit 4: Income Statement Exhibit 5: Balance Sheet FY17 FY18 FY19 H1FY20 FY17 FY18 FY19 H1FY20 Interest earned 2055 2806 3398 1907 Source of Funds Interest expensed 1165 1346 1763 1023 Share Capital 111 111 111 111 Net Interest Income 891 1460 1635 884 Reserves & Surplus 3635 4023 4933 5202 Other Income 403 49 21 67 Networth 3746 4134 5044 5313 Total Income 1294 1509 1656 951 Borrowing 11772 18530 21942 24040 Operating expense 195 232 277 82 Deposit 2484 2579 3064 3507 Employee cost 235 278 322 177 Other Liability 693 568 600 699 Depriciation 82 64 54 34 Operating profit 782 935 1003 657 Total 18695 25811 30650 33559 Provisions 62 86 107 99 Profit before tax 720 850 895 559 Application of funds Tax 225 286 361 132 Fixed Asset 348 294 305 361 Net Profit 495 563 534 427 Loans 15610 22003 27271 27932 Source: Company, ICICI Direct Research Investment 1686 2207 1866 3740 Cash 751 982 839 1077 Other Asset 300 325 368 448

Total 18695 25811 30650 33559 Source: Company, ICICI Direct Research

Exhibit 6: Ratios FY17 FY18 FY19 H1FY20 Valuation No of equity shares 11.1 11.1 11.1 11.1 EPS (|) 44.6 50.7 48.1 38.4 BV (|) 337.1 372.1 454.0 478.2 ABV (|) 329.5 363.4 433.4 437.0 P/E 37.0 32.5 34.3 43.0 P/BV 4.9 4.4 3.6 3.5 P/ABV 5.0 4.5 3.8 3.8 gearing 5.0 6.2 6.1 6.3

Margins (%) NIM 7.76 6.64 6.40 Yield on loans 14.92 13.79 13.82 Cost of funds 7.61 7.64 7.79

Quality & effciency Cost /Total net income 39.6 38.0 39.4 30.9 GNPA(%) 1.54 1.14 1.35 2.20 NNPA (%) 0.55 0.43 0.84 1.64 RoE (%) 13.2 13.6 10.6 8.0 RoA (%) 2.7 2.2 1.8 1.3

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 3 Company Update | Sundaram Finance ICICI Direct Research

RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities | Retail Research 4 Company Update | Sundaram Finance ICICI Direct Research

ANALYST CERTIFICATION

I/We, Kajal Gandhi, CA, Vishal Narnolia, MBA and Harsh Shah, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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