Sundaram Finance - Initiating Coverage - Tank full, now ready to accelerate

Sundaram Finance - Initiating Coverage - Tank full, now ready to accelerate

Rating: Buy; Target Price: Rs1,400; CMP: Rs1,164; Upside: 20.3%



Tank full, now ready to accelerate



We initiate coverage on Sundaram Finance (SUF) with a Buy rating and
target price of Rs1,400. SUF, with a respectable market share across
the asset financing chain is a beneficiary of the revival in auto
demand, especially of commercial vehicles (CV). Industry experts,
analysis of CV cycle trends and lead indicators suggest bottoming out
of the cycle with sharp recovery in FY16E. This, along with
improvement in passenger vehicle (PV) demand bodes well for Sundaram
Finance. Best in class asset quality, healthy capital position and
superior return ratios add to investor comfort. Home Finance business
is in a sweet spot. AMC and General Insurance businesses remain
profitable.

$ Sundaram Finance – proxy play on recovery in auto demand: Domain
expertise, strong brand franchise and a diversified product portfolio
are key strengths of SUF that led to healthy 19% CAGR in loan / 23%
CAGR in net profit in the past 10 years. With signs of revival in auto
demand, SUF, with its presence across the entire asset financing chain
and respectable market share stands to gain. We expect SUF to report
17.4% / 18.5% CAGR in its disbursements / loan portfolio over
FY14-17E. This will translate to 16% / 17% CAGR in NII / net profit
over the same timeframe.

$ Green shoots visible for the auto industry: Lead indicators and our
interaction with industry experts suggest signs of bottoming out of
the CV cycle. This is corroborated by our analysis of the CV cycle of
the past 42-years, commentaries from CV financiers / OEMs and 10% yoy
growth in M&HCV sales for the month of August’14 (highest in
30-months). Our auto analyst expects sharp recovery and CV volume
growth of 20%+ each in FY16E and FY17E. PV sales have improved (3%+
yoy in four consecutive months) and our analyst expects steady 14%+
yoy growth for FY16E-FY17E. Traditionally, SUF loan growth outpaces
overall auto industry growth rates and with signs of anticipated
revival in auto demand, we expect SUF to be a major beneficiary.

$ Home Finance in a sweet spot; AMC and general insurance remain
profitable: Home finance business remains in a sweet spot as reflected
in superior return ratio profile traditionally. While non-retail
portfolio (33% of total loans) saw an increase in NPAs recently (GNPA
at 2.9%), overall asset quality was comfortable. Management has
adopted a prudent strategy towards growth and should enable address
asset quality risk. We are building in 23% CAGR each for net profit
and loans over FY14-17E. General insurance and AMC businesses remain
profitable and contribute 9% to SOTP.

$ Valuation and view: We have valued Sundaram Finance on
sum-of–the-parts based valuation methodology to arrive at a target
price of Rs1,400. We have valued the standalone business at 3.3x FY17E
ABV (based on sustainable RoE based model and scarcity premium to the
business model, asset quality and returns profile). Home Finance has
been valued at 3.3x FY17E ABV and adds 12% to the SOTP. General
insurance, AMC business and other investments make up for the balance
11% of SOTP. Unlike other NBFCs which have resorted to capital
raising, strong internal accruals was enough for SUF’s growth
requirements. This is even as dividend payout has been at 27%+
(average) with two bonus issues over the past seven years and
signifies the strength of the business model.