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You are here : IndiaNotes >> Research & Analysis >> Companies >> Sundaram Finance Ltd. >> Research

Sundaram Finance Ltd: Sureshot winner

Ketan Pandit | 10 Aug, 2009  | Follow Author | Add to my Favourites 
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Sundaram Finance Ltd (SFL) was established in 1954 by Mr TS Santhanam. He was the son of Mr TV Sundaram Iyengar, the founder of TVS Group of companies.

 

SFL is involved in the following operations:

  • Investments - Deposits, Mutual funds

  • Retail Finance - Car finance, Retail finance

  • Business finance - Commercial vehicle, Equipment finance, Tyre finance, Fleet card

  • Services - Infotech solutions, BPO, Logistics services, Insurance

SFL is registered in Chennai, Tamil Nadu and has 10 subsidiaries.

Table 1

Stock data

Current Share Price (07 Aug 09)

Rs300.00

BSE code

590071

BSE Group

B

Face Value

Rs.10

Beta (since 01 Jan 08)

0.85

BSE stock circuit limits

+ / - 20.0%

52 week high/low

Rs.620 (12 Aug 08) / 145 (12 Mar 09)

Shareholding (%)

Promoters: 41.15

Institutions: 13.11

Others: 45.74

Source: BSE, Analyst Research

 
 

The approximate contribution of SFL's subsidiaries to its consolidated sales and PAT for FY09 is as follows:

 

 

 

 

Source: Analyst research

Sundaram BNP Paribas Home Finance has a lion's share in consolidated sales as well as consolidated PAT. Sundaram Infotech Solutions and Infreight logistics solutions have posted a net loss of Rs 4.43 cr and Rs 3.67 cr during FY09.

 

Significant events/milestones

Table 2

Timeline

Milestone / Event

Implication

25 Jul 2009

SFL's fixed deposits cross Rs 1,000 cr mark

An indication of SFL's growing clientele

28 Jan 2008

SFL acquires 49% stake in the paid-up capital of Sundaram Hydraulics

-

02 Feb 2007

M/s. Sundaram Home Finance Ltd becomes a wholly-owned subsidiary of SFL

Consolidation of operations

01 Apr 2004

SFL merges Lakshmi General Finance with itself

SFL gets access to LGF's clients and deposits

31 Jul 2003

SFL secures a USD45 million loan from International Finance Corporation

This enables the company to expand lending to the truck transport segment

18 Mar 2002

SFL ties up with SBI to market SBI Life's life insurance products

In return, SBI Life will customise products for customers of the various arms of SFL under group insurance schemes

2001

SFL merges its wholly-owned subsidiary Sundaram Finance Services Ltd with itself

Consolidation of operations

1999

India Equipment Leasing Ltd., Aparajita Finance Company Ltd.,
Balika Finance Co. Ltd. and Paramjyothi Finance Co. Ltd. get amalgamated with SFL

SFL gets access to the merging companies' clients and deposits

1999

SFL forms JV with Fidis, S.p.A, Italy in the name of Fiat Sundaram Auto Finance Limited for financing FIAT cars

-

Oct 1996

SFL signs MoU with Winterthur Swiss Insurance to enter the general insurance business in India

SFL decides to tap the general insurance market after this sector was thrown open to private players

1996

SFL enters into a JV with Newton Management Limited, U. K. and Stewart Newton Holdings (Mauritius) Limited for setting up an AMC

Diversification of operations

1986

SFL starts marketing of Allwyn Nissan vehicles

-

1981

SFL starts equipment leasing operations

Diversification of operations

1961

SFL goes public

-

1954

Mr TS Santhanam establishes Sundaram Finance

-

Source: BSE, Analyst research

 

Financial performance (standalone)

Table 3

Particulars

2006

2007

2008

2009

Total Income (Rs. cr)

595.85

671.88

1023.30

1114.76

PAT (Rs. cr)

170.59

100.46

212.54

150.73

PAT/Total Income (%)

28.62

14.95

20.77

13.52

ROE (%)

61.41

36.17

76.52

27.13

Current Ratio

14.77

15.91

11.23

12.51

Price to Book Value Ratio (as on 31 Mar 200X)

NA

1.24

1.54

1.44*

Source: BSE, Analyst research
*...as on 07 Aug 09

  • From FY06 to FY09, Total Income has increased by a CAGR of 23.22%, but PAT has decreased at a marginal rate of 4.04% respectively. This decrease in PAT as well as the issue of bonus shares makes the ROE appear unimpressive. The net worth of the company rose by 10.54% y-o-y in FY09

  • The Current Ratio is healthy throughout. As high as 89% of the the total assets are net current assets, indicating a strong balance sheet. Only 6.89% of the total assets are held up as investments. Further, only 50.62% of these investments are into equities indicating neglibible exposure to market risk.

  • The Debt-Equity Ratio for FY09 is as high as 5.44%. No wonder around 64.36% of the total expenses are interest costs.

  • As on 31 Mar 09, SFL has Rs.618 cr of outstanding Interest Rate Swaps for hedging against interest rate risks.

  • During FY09, SFL sold investments worth Rs9.75 cr which forms 0.9% of the total income from operations

 

 

SWOT analysis

 

Table 4

Strengths

Weaknesses

 

·  High quality asset portfolio. Gross and net NPAs are only 1.64% and 0.75% of the total assets

 

·  SFL has a strong network of 400 branches spread all over India

 

·  As high as 81% of the matured deposits are renewed, indicating the faith of the depositors in SFL

 

·  SFL's Investor Relation Services has got the ISO 9001:2000 certification by Bureau Veritas Certification (India) Pvt Ltd

 

·  SFL's short-term borrowings and fixed deposits have been rated as “AAA” (highest safety)

 

·  Operates in a highly fragmented domestic credit market where margins are lower

 

·  Delay in payments by government agencies for construction equipment

Opportunities

Threats

 

· SFL is venturing into the financing of cars and multi-utility vehicles

 

· An increase in freight movement would revive both new and used commercial vehicles sales, triggering the need of their financing

 

·  Decreasing sale of commercial vehicles. In FY09, sales of M&HCVs were down 33.16% y-o-y

 

·  Cutthroat competition from a long list of players

 

Source:Company annual report

 

Valuation and recommendation

 

The following charts shows the closing price movements of SFL from 07 Jan 08 to 07 Aug 09 and the BSE trade volumes during the same period:

   

 

 

 

 

 

Source:Analyst Research

 

The steep fall in Aug 08 is because of the price correction after the 1:1 bonus issue. A trend line has been inserted to track the price trend

 

The following chart shows the closing price movements of SFL and the Sensex, both rebased on a scale of 100 during the same period:

 

 

 

 

Source:Analyst Research

 

The above chart proves that SFL is a low beta stock (see table 1). Since Jan 08, it has underperformed the Sensex.

 

The following table analyses the current returns to an investor, if the stock was purchased at different periods of time.

Table 5

Stock bought

Opening price on that day (Rs.)

% returns today (07 Aug 2009)

Beginning of 2008 (01 Jan 08)

770.00

-61.04

A year ago (07 Aug 08)

579.00

-48.19

A month ago (07 Jul 09)

275.00

09.09

A week ago (31 Jul 09)

280.00

07.14

Source:Analyst Research

 

 

The comparison of SFL with its peers is as shown:

Table 6

Company

P/E ratio

SFL

6.81

United Credit Ltd

NA (suffered a loss)

HDFC Bank

24.86

ICICI Bank

31.16

Ceejay Finance

03.82

Bhandari Consultancy and Finance

22.95

Anjani Finance

25.33

Source: Analyst Research

 

 

The stock is currently trading at its 11-month low.

 

 

Investment rationale

  • SFL has ventured into the financing of cars and multi-utility vehicles, which is a growing market

  • Foreseeing the slump in commercial vehicles sales in FY09, SFL reduced its exposure on commercial vehicles which helped it to report 11% growth in net profits (Rs 150.73 crore) in FY09. This highlights the foresight of the management

  • The FY09 consolidated accounts of SFL have excluded Sundaram Securities Services Ltd as it became a subsidiary on 27th June 2008. SSSL has entered into a JV with BNP Paribas Securities Services (BP2S) to provide registrar and share transfer agency services (including for mutual funds) and other ancillary securities services in India. Hence SSSL's operations are certainly going to add value to SFL's FY10 consolidated accounts

  • SFL's 2 JVs - Royal Sundaram Alliance Insurance Company Ltd and BNP Paribas Sundaram Global Securities Operations Pvt Ltd - are doing extremely well as reflected in SFL's FY09 annual report

Keeping all the above factors in mind, I recommend a "buy" on this stock at current levels for the long term.

 

ketan@valuenotes.com
 
Disclaimer:

The author has taken due care and caution in compilation of data and analysis. The recommendations are his/her personal views. He/She shall not accept any liability whatsoever arising from the use of any of the above content.

Sources have been mentioned at relevant places in the article. In spite of this, the author does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

The author does not hold positions in the stock.



 
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