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Sundaram Finance: Asset Quality Best in Class

Sundaram Finance Ltd was found in 1954 by Mr TS Santhanam. Mr TS Santhanam expired in year 2005. Further, the Company has its registered office in Chennai. Mr TS Santhanam is the son of Mr TV Sundaram, founder of TVS Group.

Sundaram Finance is in the business of Financing Commercial Vehicles, Cars, Construction Equipment, Tractor and others. Sundaram Finance is Registered with RBI as Deposit accepting NBFC (Non Banking Financial Company).

Sundaram Finance Family chart

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(A) Board of Directors of Sundaram Finance Ltd

i) Mr Harsha Viji - Wholetime Director & Vice Chairman

Mr Harsha Viji is the Wholetime Director & Vice Chairman of the Company. Further, he has done BCom, is a Chartered Accountant and has a MBA degree from Ann Arbor, Michigan. He is of 45 Years of age. He has nearly 2 decades experience in areas of specialisation particularly, strategy formulation, joint venture negotiations, new business development etc.

Mr Harsha joined the Company in 2005. Mr Viji has worked with Mckinsey & Company prior to joining Sundaram Finance. Further, His remuneration for FY21 was Rs 4.44 which is 0.08% of the Net Sales and 0.44% of the Net Profit.

ii) Rajiv C Lochan - Managing Director

Mr Rajiv C Lochan is the Managing Director of the Company. His age is 49 years. He has done B.Tech. from IIT, MS for MIT and has done MBA from the Columbia Business School. Further, Mr Rajiv joined Sundaram in 2020. Moreover, prior joining sundaram Finance he was Managing Director and CEO of Kasturi and Sons Ltd., publishers of "The Hindu".

His remuneration for FY21 was Rs 2.41 which is 0.05% of the Net Sales and 0.24% of the Net Profit.

iii) Mr S Viji - Director

Mr S Viji is the Director of the Company.

Mr. Viji is an Associate Member at The Institute of Chartered Accountants of India. Also, Mr Viji has done MBA from the University of Michigan and has an undergraduate degree from the University of Madras. In the past he held the position of Non-Executive Chairman for Sundaram Finance Holdings Ltd.

He is 75 Years old.

iv) Mr S Ram - Director

Mr S Ram is the Director of the Company. Further, he has a graduate degree from the University of Birmingham and an undergraduate degree from College of Engineering Guindy.

He is 81 years old.

(B) Shareholding Pattern

Sundaram Finance shareholding pattern
Sundaram Finance more than 1% promoters
Sundaram Finance mor than 1% public

Mutual Fund Holdings on last 4 Quarters

Sundaram Finance mutual fund holdings

From The Quarter ending 31-Mar-21 till 31-Dec-21, the Shareholding of Mutual Fund has increased.

(C) Group Structure

Sundaram Finance group structure
Sundaram Finance group details

(D) Sundaram Finance - Assets Under Management

Sundaram Finance AUM

The AUM of the Company has grown at CAGR ~10% p.a. from FY14 to FY21.

(E) Asset Wise AUM

Sundaram Finance Segment wise AUM

As on 31-Dec-21, ~45% of the Total AUM including funding for Commercial Vehicles (CV). AUM in CV Segment has reduced since 31-Mar-20. However, rest of the segments contribute more or less the same % in the over AUM since 31-Mar-20.

Moreover, if compared with AUM Segments of Mahindra & Mahindra Finance Ltd (MMFSL), MMSFL's AUM's is more diversified. For instance, 30% AUM of MMFSL is Auto / Utility Vehicles followed by 22% in Cars finance (Sundaram Finance is also 25% in this segment), 17% Tractors , 16% in Commercial Vehicles & Equipment, rest others as on 31-Mar-21.

(F) Region Wise AUM

Sundaram Finance Region Wise AUM

Sundaram Finance has major portion of its customers in South Region of India, ~59% as on 31-Dec-21. Further, followed by ~24% in North India as on 31-Dec-21 and remaining small percent of the Customers are is in West & East.

As on 31-Dec-21, Sundaram Finance had 612 Branches spread all over India.

(G) Sundaram Finance: Branch Network

Sundaram Finance Branch network

Sundaram Finance has 327 branches in South and 179 in North India. Followed by, 66 in West and 40 in the East India.

(H) Sundaram Finance: Funding Mix

Sundaram Finance funding Mix

Sundaram Finance is Deposit accepting NBFC. Further, the Company raises term funding from Banks, Mutual funds, Insurance companies and others in the form of non-convertible debentures and term loans. The Company also uses working capital limits. Also, the Company raises resources through securitisation and assignment of receivables. Lastly, the Company also raises funds by issuing commercial paper.

(I) Gross NPAs to Gross Advances

Sundaram Finance gross NPA

(J) Net NPAs to Net Advances

Sundaram Finance Net NPA

The Net NPA's to net advances although has increased since Mar-18, but for FY21 still it is lowest as compared to the peers of Sundaram Finance. For instance, Net NPA Ratio of Cholamandalam Investment and Finance Company Ltd. is 2.25%, Mahindra & Mahindra Financial Services Ltd. is 3.97% and for Shriram Transport Finance Company Ltd. its 4.26% for FY21.

(K) Sundaram Finance: Interest Parameters

i) Interest Income

Sundaram Finance interest income

The Interest Income grew at CAGR ~13% pa from FY12 to FY21.

ii) Interest Expense

Sundaram Finance interest expense

The Interest Expense grew at CAGR ~9% pa from FY12 to FY21.

iii) Net Interest Income - Sundaram Finance

Sundaram Finance net interest income

iv) NIM% as % of average assets - Sundaram Finance

Sundaram Finance NIM%

For FY21 the interest margin is 4.4%. Also, NIM% is falling since FY15. NIM% of Sundaram Finance is lower, as compared to Cholamandalam Investment and Finance Company Ltd (7.2%) and Mahindra & Mahindra Financial Services Ltd (7.7%).

(L) Sundaram Finance: Financial Parameters

Sundaram Finance Financial Parameters

In FY19 the Company earned profit on sale of shares in Royal Sundaram General Insurance Co Ltd (considering the exceptional profit). The ROE% of the Company has remained quite healthy during the past 10 FYs. The PATM increased as compared to FY20. PATM% is 19.10% in FY21 as compared to 17.11% in FY20. The growth of PAT is also good, at CAGR 10% p.a. from FY12 to FY21.

The Company’s tight rein on operating costs and its ability to raise resources at competitive rates enabled it to maintain its margins at a reasonably healthy level.

(M) Management Discussion and Concall Highlights

  • Due to COVID-19 the commercial vehicles(CV) segment was negatively affected. The second half of
    the year was encouraging, on the whole. Although, the sharp drop in economic activity and a postponement of the capex cycle led to a 28% YOY drop in Medium & Heavy Commercial Vehicles (MHCV) volumes and a 17% YOY drop in Light Commercial Vehicles (LCV) volumes.
  • Further, increased e-commerce sales and brickand-mortar businesses adopting door delivery enabled a ramp up in Small Commercial Vehicles (SCV) sales, which partially cushioned the drop in volumes.
  • FY21 was a very strong year for tractors. The reason for the same was good harvests, increased government spending in rural India, strong agricultural output and elevated farmer sentiment during past 3 years which resulted in a 27% YOY growth in tractor sales volumes in FY21.
  • In FY21 there was 13% YOY decline in two-wheeler volumes due to job losses in urban areas. Further, eventually the need for person vehicles increased, but it did not effect the demand for Passenger Vehicles (PV). Still, PV Segment de-grew by 2% in volumes. However, within the PV segment, utility vehicles witnessed growth of 8% YOY.

Concall H1 FY22 - Sundaram Finance

  • Commercial vehicles industry has experienced tough time due to GST impact, COVID-19, BS6 norms. Also, due to COVID-19, the demand for School Buses, Tourism and transport operators got negatively effected. Although, these are likely to recover as schools and offices open up. Further, Restructuring has been mainly done in the bus and tourist operator segments for 3-6 months bearing in mind the underlying value of the asset.
  • Also, as the economy picks up the demand for Tractors also picks up. Construction Equipment (CE) and Tractors have seen robust demand in the past few years. National Infrastructure Pipeline and improved construction activities are likely to drive demand for CE.
  • The ROE% of the Company is at a good position as per the management.
  • Further, About the Margin Pressures: Margin pressures exist in specific sectors like Large fleet operators. However, in Tractors & Farm Equipment there is less supply & sufficient demand, so better margins are there.
  • The management finds it difficult to predict 5 year strategy due to COVID.
  • As per the Management, Passenger Vehicles and Used Vehicle segment has good opportunities in future.
  • Also, the Company has been investing in technology, data science, etc. to make its processes more robust and brings in operational efficiencies.

(N) Strengths

i) Asset Quality

The Asset Quality of Sundaram Finance is best as compared to its peers in the industry. It has the lowest Net NPA Ratio for FY21 if compared to Net NPA Ratio of Cholamandalam Investment and Finance Company Ltd (2.25%), Mahindra & Mahindra Financial Services Ltd. (3.97%) and for Shriram Transport Finance Company Ltd (4.26%) for FY21.

ii) Collection Efficiency

Collection Efficiencies have been improving each month. Recovery in the northern region has been better than South, as the impact of second wave was more in the Southern states. Collection efficiency has already reached pre-Covid levels in the North while South will take few months of remaining FY22 to get there.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications.

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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