Sundaram Finance

Sundaram Finance is expected to grow at a high rate and its valuations are reasonable. Investors can consider this stock

 

SUNDARAM Finance is a non-banking financial company (NBFC) primarily focused on commercial vehicle (CV) and car finance segments. The company's business follows the up and down in the automobile sector and in FY10, about 55-60% of its loan book came from CV loans and 25-30% from car finance.

   When the auto sector was going through turbulent times in FY09 due to the slowdown, Sundaram Finance was also affected. The growth in its net profit from continuing operations fell from 35% in FY08 to 11% in FY09. However, it must be noted that the slowdown was severe, as many top CV manufacturers saw their net profit evaporating. For instance, Tata Motors reported a loss of Rs 2,800 crore approximately in FY09. Despite such an economic environment, Sundaram Finance managed to grow its bottom line in FY09, which shows the resilience in its business.

   Come FY10, the recovery in auto market started. Sundaram Finance grew at a higher rate than the industry. For instance, the company reported a growth of 51% in disbursements in the medium & heavy commercial vehicle (M&HCV) segment vis-à-vis the industry growth of 33% in FY10. Similarly, it grew its disbursements in car finance at a higher than industry rate. This helped it improve the market share in car finance segment to 4% in FY10 from 2.5% two years ago.

   The company boasts of the best asset quality in the industry. At the end of FY10, net non-performing assets (NPA) formed 0.45% of advances. In fact, at such levels, its asset quality is comparable to the best Indian banks. It maintains a strict control on its asset book, as none of the loans it has financed are unsecured. This gives a cushion to investors as bad assets can wipe out a financial institution's profits. Moreover, a good asset quality allows a financer to press the lending accelerators in the recovery phase. This is exactly what Sundaram Finance has done in FY10.

   The company posted good numbers all through the year ending March 2010. Its net profit from continuing operations increased by 34% in FY10. This comes on the back of 29% growth in disbursements.

   What makes Sundaram Finance an interesting story is that the segment it finances, primarily CV, tends to grow at a much higher rate than the industry in times of economic boom. And since the industry is cyclical in nature, it is expected that the recovery, which started last year, will continue for a year at least. For instance, last time, the bull run in CV market lasted from FY04 to FY07. So, Sundaram Finance will continue to grow at high levels for the next one year at least.

VALUATIONS

At current prices, Sundaram Finance's stock is trading at a price-to-earning multiple (P/E) of 11. Other NBFCs are trading at much higher valuation. This shows that the stock is reasonably priced. Since the company's business is in a recovery mode, thanks to general recovery in automobile sector and specifically to CV segment, the profit growth will remain high going forward. This means that the stock price can post gains without stretching the valuations. Moreover, the stock has earlier traded at high valuations. In the run up to the peak of last bull run, its P/E ranged from 15 to 20. So the stock price can post gains due to increase in valuations too. Moreover, the valuations in other NBFCs look a bit stretched. The liquidity can move to this stock as the company is expected to grow at a high rate. This makes it a compelling case for investors to consider this stock from one year's perspective.