: price: ABV: How does our one year outlook change? While we continue to believe that SUF is a multi-year compounding opportunity in the asset and home financing segments, we take note of the under-performance in the home finance subsidiary, moderation in profitability of the core business led by competition (specifically the cars segment) and lacklustre performance of the insurance business. netheless, clear cut emphasis on asset quality over growth at all times and end to end understanding of the market led by the group s positioning (auto manufacturer, OEM supplier and financier) continues to provide comfort. We take additional comfort from the conservative business philosophy of the management and strong traction in the CV cycle. We moderate our rating to with a TP of Rs.1,509 valuing the business on SOTP basis and ascribing the core business a 4.0x on FY18E and housing business at 3.0x FY18E ABV. We note that even as SUF benefits from the MHCV recovery (MHCV book up 24% yoy), pricing pressures in the cars portfolio (down 2% yoy) coupled with a weak rural economy is likely to restrict growth to 12% in FY17. We believe that the intensifying pricing pressures in the cars and MHCV portfolio (55bps decline in NIMs in FY16) may leave limited scope to diversify into higher yielding segments; expect NIM at 6.4% for FY17. We are enthused by the transition to 90DPD of recognizing GNPAs; GNPAs remain best in class by a wide margin - even as other NBFCs grapple with the NPA transition and changes to the underlying business model. Expect GNPAs at 1.9% in FY17 PCR of ~60%. How does our 3 year Outlook change? Expect growth rate to remain in a 12-14% range between FY17-19 with CVs contributing incrementally (70%) to growth in the medium term. Expect margins to sustain at ~6.4% over FY17-19. One of the few NBFCs in the AFC space to be at 90DPD of GNPA recognition - continue to bear comfort on asset quality (<2% GNPA). We note that monetization of investments and performance of subsidiaries (resulting in flow of dividend to SUF) remains a key metric over the medium term. Dependence on contribution of other income to the overall profitability of the company is expected to remain high in the medium term. Financial summary Year 4QFY16 Update Promoters 36.2 Institutions 15.9 Public 47.9 % 1m 3m 12m SUF 10% 15% -1% Sensex 6% 9% 0% Bankex 8% 17% -1% Key estimate revision NII (Rs. mn) PAT (Rs. mn) FY17E Bloomberg Shares o/s Market Cap FY18E Old New Change Old New Change NII 12,288 12,094-2% 14,382 13,639-5% NIM% 6.4% 6.4% -3bps 6.4% 6.4% -3bps PAT 4,940 5,244 6% 5,773 5,955 3% ROA% 2.2% 2.36% 16bps 2.2% 2.40% 20bps ABV 326 324-1% 362 362 0% EPS 44 47 7% 52 54 3% All figures in Rs. mn, except ABV and EPS, which is in Rs. 06 Jun, 2016 SUF IN 111mn Rs. 159bn 52-wk High-Low Rs. 1,620-1,106 3m Avg. Daily Vol Index Rs. 86mn BSE100 ROE (%) ROA (%) ABV (Rs.) P/E (x) FY16 10,947 4,773 15.2% 2.4% 290 23.6 FY17E 12,094 5,244 15.0% 2.4% 324 21.0 FY18E 13,639 5,955 15.3% 2.4% 362 17.8 FY19E 15,475 6,941 15.8% 2.5% 409 22.9 FY20E 17,476 7,775 15.7% 2.5% 466 20.5 Abhinesh Vijayaraj abhinesh@sparkcapital.in +91 44 4344 0006 Nishant Rungta nishant@sparkcapital.in +91 44 4344 0033 Navin Babu E S navin@sparkcapital.in +91 44 4344 0065 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1
Quarterly Financial Statements Standalone financial results Rs. mn\period Mar-16 Mar-15 yoy Growth Dec-15 qoq Growth FY16 FY17E yoy Growth Income from Operations 5,823 5,778 0.8% 5,909-1.5% 23,124 24,332 5.2% Interest Expended 2,999 3,020-0.7% 3,242-7.5% 12,177 12,238 0.5% Net Interest Income 2,824 2,758 2.4% 2,667 5.9% 10,947 12,094 10.5% Other Income 371 103 261.8% 220 68.5% 1,626 1,522-6.4% Total Income 3,195 2,861 11.7% 2,887 10.7% 12,573 13,616 8.3% Operating Expenses 1,218 1,150 5.9% 1,239-1.7% 4,930 5,238 6.2% Pre-Provision Profit 1,977 1,711 15.6% 1,648 20.0% 7,643 8,378 9.6% Provisions 263 505-48.0% 176 49.5% 811 777-4.1% PBT 1,715 1,205 42.3% 1,472 16.5% 6,832 7,601 11.2% PAT 1,221 907 34.7% 1,022 19.5% 4,773 5,244 9.9% NIM% 6.4% 6.8% -44 bps 6.2% 22 bps 6.4% 6.4% -4 bps ROA% 2.3% 1.9% 42 bps 2.0% 33 bps 2.4% 2.4% -1 bps Gross NPA% 2.08% 1.45% 63 bps 2.05% 3 bps 2.08% 1.90% -18 bps Net NPA% 0.92% 0.52% 40 bps 1.08% -16 bps 0.92% 0.80% -12 bps Provision Coverage Ratio 55.8% 64.1% -833 bps 47.3% 845 bps 55.8% 57.9% 213 bps Loan Assets 178,950 162,610 10.0% 174,490 2.6% 178,950 200,518 12.1% Borrowings 126,160 125,354 0.6% 141,521-10.9% 126,160 142,368 12.8% Net Worth 33,126 29,781 11.2% 33,347-0.7% 33,126 36,833 11.2% SOTP (on Earnings) Rs. Per Share Core business value @ 23x FY18E 1,033 Housing business @ 18x FY18E 138 AMC @ 5% FY18E AUM 121 Insurance @ 1.1x FY18E GWP 152 Other Investments @ 4x Investments 65 Total Value per share 1,509 SOTP (on Book Value) Rs. Per Share Core business value @ 4.0x FY18E 1,031 Housing business @ 3.0x FY18E 140 AMC @ 5% FY18E AUM 121 Insurance @ 1.1x FY18E GWP 152 Other Investments @ 4x Investments 65 Total Value per share 1,509 Page 2
Financial Summary Abridged Financial Statements Key Metrics Rs.mn FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E Profit & Loss Growth ratios Net Interest Income 10,947 12,094 13,639 15,475 17,476 ABV per share 10% 12% 12% 13% 14% Other Income 1,626 1,522 1,719 1,954 1,946 AUM growth 10% 12% 14% 14% 14% Total Income 12,573 13,616 15,358 17,429 19,422 Borrowings 1% 13% 13% 13% 14% Operating Expenses 4,930 5,238 5,725 6,257 6,839 NII 1% 10% 13% 13% 13% Pre-Provisioning Op. Profit 7,643 8,378 9,633 11,172 12,583 PAT 5% 10% 14% 17% 12% Provisions 811 777 1,003 1,112 1,314 EPS 5% 10% 14% 17% 12% PBT 6,832 7,601 8,630 10,060 11,269 Asset-Liability Profile PAT 4,773 5,244 5,955 6,941 7,775 Leverage (x) 5.4 5.3 5.3 5.2 5.2 Balance Sheet Leverage (x) (Incl Off B/S) 6.4 6.4 6.4 6.3 6.3 Networth 33,126 36,833 41,182 46,518 52,688 Core Tier 1- CAR 14.8% 15.0% 15.0% 15.1% 15.2% Paid Up Capital 1,111 1,111 1,111 1,111 1,111 Profitability and Efficiency Reserves 32,015 35,721 40,071 45,407 51,577 Net Interest Margin 6.4% 6.4% 6.4% 6.4% 6.3% Others Capital Instruments ROA (incl Off B/S) 2.4% 2.4% 2.4% 2.5% 2.5% Borrowings 126,160 142,368 160,531 181,403 206,427 ROE 15.2% 15.0% 15.3% 15.8% 15.7% Total Liabilities & Networth 173,926 193,596 216,168 242,163 271,620 Cost/Income 39.2% 38.5% 37.3% 35.9% 35.2% Advances 178,950 200,518 227,704 259,147 294,895 Dupont Analysis Fixed Assets 2,784 2,437 2,062 1,655 1,215 NII/Total Assets (On+Off) 5.4% 5.4% 5.5% 5.6% 5.6% Net Current Assets 10,013 10,420 10,843 11,283 11,742 TI/Total Assets (On+Off) 6.2% 6.1% 6.2% 6.3% 6.2% Total Assets 173,926 193,596 216,168 242,163 271,620 Opex/Total Assets (On+Off) 2.4% 2.4% 2.3% 2.3% 2.2% Off Balance Sheet Assets 37,401 40,104 45,541 51,829 58,979 PPOP/Total Assets (On+Off) 3.8% 3.8% 3.9% 4.0% 4.0% Total Assets (incl. Off B/S) 211,326 233,699 261,709 293,993 330,599 Provisions/Total Assets (On+Off) 0.4% 0.3% 0.4% 0.4% 0.4% PAT/Total Assets (On+Off) 2.4% 2.4% 2.4% 2.5% 2.5% Shares outstanding (mn) 111 111 111 111 111 Valuation Current market price (Rs.) 1,432 1,432 1,432 1,432 1,432 Book Value per share (Rs.) 298 332 371 419 474 Market capitalization (Rs. mn) 159,101 159,101 159,101 159,101 159,101 Adj Book Value per share (Rs.) 290 324 362 409 466 Earnings per share (Rs.) 43.0 47.2 53.6 62.5 70.0 P/ABV (x) 5.5 4.5 3.7 3.5 3.1 Dividend per share (Rs.) 11.00 11.50 12.00 12.00 12.00 P/E (x) 23.6 21.0 17.8 22.9 20.5 Page 3
Crystal Ball Gazing Credit costs to FY11 FY15 FY16 FY17E FY18E FY19E FY20E remain low at NIM 5.9% 6.8% 6.4% 6.4% 6.4% 6.4% 6.3% Over FY16-19, SUF is expected to clock a 12% CAGR in loan book translating into a loan book size of Rs.262bn a 1.5x Expect NIMs to continue to trend at 6.4% over the next two years with limited scope for upside current levels due to relentless focus on asset quality by the management Provisions 0.4% 0.6% 0.5% 0.4% 0.5% 0.5% 0.5% Credit Costs 0.4% 0.6% 0.5% 0.4% 0.5% 0.5% 0.5% ROA 2.3% 2.4% 2.4% 2.4% 2.4% 2.5% 2.5% Entry = @ 3.7x FY18E increase in loan book from current levels (loan book of Rs.179bn). SUF s conservative approach in terms of prioritizing asset quality over loan growth will continue to act as an overhang on the AUM growth in the medium ROEs to remain at similar levels with growth lagging RoEs to remain flat at ~15.5% and be primarily a function of value unlocking in investments FY11 FY15 FY16 FY17E FY18E FY19E FY20E ROE 20.8% 16.9% 15.2% 15.0% 15.3% 15.8% 15.7% Leverage 7.7 6.0 5.4 5.3 5.3 5.2 5.2 T1 CAR 10.2% 17.2% 14.8% 15.0% 15.0% 15.1% 15.2% ABV (Rs.) 137 264 290 324 362 409 466 Cumulativ e Dividend of Rs.35.5 TOTAL RETURN OF 1.4x term, thus continuing to lag the industry average. Moreover, we believe that monetization of the investments will remain a key variable for SUF. Monetizing investments and revival in growth may lead to a A possible upside in valuations P/ABV Multiple FY20E Core ABV Core ABV Valuation SOTP Valuation Price 4.0 358 1,430 572 2,002 4.3 358 1,538 572 2,110 ABV CAGR of 13%, exit multiple of 4.0x Page 4
Spark Disclaimer Rs. 2000 1500 1000 500 Sundaram Finance 3 Year Price and History Report Date Price Reco. 03/Feb/16 1,360 1,464 Buy 03/v/15 1,520 1,640 Buy 26/Aug/15 1,467 1,611 Buy 05/Jun/15 1,470 1,650 Buy 15/Sep/14 1,100 1,320 Buy 0 Jun-13 Dec-13 Jun-14 v-14 May-15 v-15 May-16 Price Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker. We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of time. Absolute Interpretation BUY Stock expected to provide positive returns of >15% over a 1-year horizon Stock expected to provide positive returns of >5% <15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% -10% over a 1-year horizon SELL Stock expected to fall >10% over a 1-year horizon Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure advisory services. This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. thing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this document. Spark Capital, its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Page 5
Disclaimer (Cont d) This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information. Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of or reliance on this report. Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of Interest Statement Analyst financial interest in the company Group/directors ownership of the subject company covered Investment banking relationship with the company covered Spark Capital s ownership/any other financial interest in the company covered Associates of Spark Capital s ownership more than 1% in the company covered Any other material conflict of interest at the time of publishing the research report Yes/ Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months: Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services Products or services other than those above In connection with research report Whether Research Analyst has served as an officer, director or employee of the subject company covered Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst s personal views about any and all of the subject securities or issuers; and no part of the research analyst s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations. Page 6