: price: ABV: How does our one year outlook change? Retain our positive view on the stock. We continue to believe that SUF is a multi-year compounding opportunity in the asset and home financing segments. Clear cut emphasis on asset quality over growth at all times, end to end understanding of the market led by the group s positioning (auto manufacturer, OEM supplier and financier) and a seasoned management team place the business in an exalted position. We continue to value the business on SOTP basis and maintain with a target price of Rs.1,464 valuing the core business at 4.3x FY17E and housing business at 4.1x FY17E ABV. We note that even as SUF benefits from the MHCV recovery (MHCV book up 21% yoy), pricing pressures in the cars portfolio (down 1% yoy) coupled with a weak rural macro translating to a 12% decline in the tractors portfolio, is likely to restrict growth to 10%/14% in FY16/FY17. We also note intensifying pricing pressures in the MHCV portfolio leading to a 40bps decline in NIMs, with limited scope to diversify into higher yielding segments expect NIM to settle at 6.4% for FY16/FY17. GNPAs remain best in class by a wide margin - even as other NBFCs grapple with the NPA transition and potential changes to the underlying business model. Expect GNPAs at 1.6% in FY16 with a healthy provision coverage of ~65%. Expect a smooth transition to 90 DPD to comply with RBI s regulation well before March 2018. How does our 3 year Outlook change? Expect >18% growth to pick up from FY18 with CVs contributing incrementally to growth in the medium term. Expect margins to sustain at ~6.4% over FY16-18. Transition of NPA recognition from 120-90 DPD is expected to remain smooth vis-à-vis competition and hence ROEs of ~15% expected to sustain through the cycle in the extant lending model. Additionally ~50% PCR currently provides greater comfort on the transition to 90 DPD. Expect Cost to income ratios to moderate to ~38% post FY18 with growth returning to >18% trajectory. Expect T1 CAR to remain around 15% over this phase. Financial summary Year 3QFY16 Update Promoters 36.2 Institutions 15.9 Public 47.9 % 1m 3m 12m SUF -1% -10% -9% Sensex -6% -8% -16% Bankex -12% -14% -25% Key estimate revision NII (Rs. mn) PAT (Rs. mn) FY16E Bloomberg Shares o/s Market Cap FY17E Old New Change Old New Change NII 11,404 10,917-4% 13,088 12,288-6% NIM% 6.63% 6.41% -22bps 6.60% 6.4% -17bps PAT 4,972 4,732-5% 5,224 4,940-5% ROA% 2.45% 2.34% -11bps 2.27% 2.20% -7bps ABV 298 299 0% 324 326 1% EPS 44.7 42.6-5% 47 44-5% All figures in Rs. mn, except ABV and EPS, which is in Rs. 03 Feb, 2016 SUF IN 111mn Rs. 152bn 52-wk High-Low Rs. 1,824-1,275 3m Avg. Daily Vol Index Rs. 87mn BSE100 ROE (%) ROA (%) ABV (Rs.) P/E (x) FY15 10,871 4,541 16.9% 2.4% 262 23.1 FY16E 10,917 4,732 14.8% 2.3% 299 21.2 FY17E 12,288 4,940 13.8% 2.2% 326 19.0 FY18E 14,382 5,773 14.6% 2.2% 362 15.1 FY19E 17,221 6,769 15.4% 2.2% 405 22.4 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 Dec-15 Dec-14 yoy Growth Sep-15 qoq Growth FY15 FY16E yoy Growth Income from Operations 5,909 5,744 2.9% 5,841 1.2% 22,547 23,313 3.4% Interest Expended 3,242 2,982 8.7% 3,048 6.4% 11,676 12,396 6.2% Net Interest Income 2,667 2,762-3.4% 2,793-4.5% 10,871 10,917 0.4% Other Income 220 174 26.6% 876-74.9% 1,144 1,479 29.3% Total Income 2,887 2,936-1.7% 3,669-21.3% 12,015 12,397 3.2% Operating Expenses 1,239 1,154 7.4% 1,274-2.7% 4,528 4,958 9.5% Pre-Provision Profit 1,648 1,782-7.5% 2,395-31.2% 7,487 7,439-0.6% Provisions 176 162 8.5% 196-10.5% 975 620-36.4% PBT 1,472 1,620-9.1% 2,198-33.0% 6,512 6,819 4.7% PAT 1,022 1,110-7.9% 1,540-33.6% 4,541 4,732 4.2% NIM% 6.17% 6.93% -76 bps 6.65% -48 bps 6.80% 6.41% -40 bps ROA% 2.02% 2.45% -43 bps 3.13% -111 bps 2.40% 2.34% -5 bps Gross NPA% 2.05% 2.40% -35 bps 1.92% 13 bps 1.45% 1.55% 10 bps Net NPA% 1.08% 1.59% -51 bps 1.00% 8 bps 0.52% 0.55% 3 bps Provision Coverage Ratio 47.32% 33.75% 1357 bps 47.92% -60 bps 64.10% 64.52% 42 bps Loan Assets 174,490 160,290 8.9% 171,400 1.8% 162,610 178,165 9.6% Borrowings 141,521 130,496 8.4% 141,223 0.2% 125,354 144,858 15.6% Net Worth 33,347 27,653 20.6% 32,320 3.2% 29,781 34,159 14.7% SOTP (on Earnings) Rs. Per Share Core business value @ 23x FY17E 944 Housing business @ 20x FY17E 172 AMC @ 5% FY17E AUM 110 Insurance @ 1.4x FY17E GWP 188 Other Investments @ 3x Investments 49 Total Value per share 1,464 SOTP (on Book Value) Rs. Per Share Core business value @ 4.3x FY17E 944 Housing business @ 4.1x FY17E 172 AMC @ 5% FY17E AUM 110 Insurance @ 1.4x FY17E GWP 190 Other Investments @ 3x Investments 50 Total Value per share 1,464 Page 2
Financial Summary Abridged Financial Statements Key Metrics Rs.mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E Profit & Loss Growth ratios Net Interest Income 10,871 10,917 12,288 14,382 ABV per share 24% 14% 9% 11% Other Income 1,144 1,479 1,166 1,365 AUM growth 4% 10% 14% 19% Total Income 12,015 12,397 13,453 15,748 Borrowings 6% 16% 13% 19% Operating Expenses 4,528 4,958 5,320 6,176 NII 3% 0% 13% 17% Pre-Provisioning Operating Profit 7,487 7,439 8,133 9,571 PAT 3% 4% 4% 17% Provisions 975 620 1,015 1,252 EPS 3% 4% 4% 17% PBT 6,512 6,819 7,118 8,319 Asset-Liability Profile PAT 4,541 4,732 4,940 5,773 Leverage (x) 5.0 4.7 4.9 5.1 Balance Sheet Leverage (x) (Incl Off B/S) 6.0 5.3 5.3 5.6 Net worth 29,781 34,159 37,495 41,529 Core Tier 1- CAR 15.5% 16.2% 15.7% 14.8% Paid Up Capital 1,111 1,111 1,111 1,111 Profitability and Efficiency Reserves 28,669 33,048 36,384 40,418 Net Interest Margin 6.8% 6.4% 6.4% 6.4% Others Capital Instruments - - - - ROA (incl Off B/S) 2.4% 2.3% 2.2% 2.2% Borrowings 125,354 144,858 163,684 194,916 ROE 16.9% 14.8% 13.8% 14.6% Total Liabilities & Net worth 167,612 196,903 222,446 260,292 Cost/Income 37.7% 40.0% 39.5% 39.2% Advances 137,750 163,887 187,491 223,266 Dupont Analysis Fixed Assets 3,109 3,049 2,986 2,916 NII/Total Assets (On+Off) 5.7% 5.4% 5.5% 5.5% Net Current Assets 10,299 11,148 12,066 13,061 TI/Total Assets (On+Off) 6.3% 6.1% 6.0% 6.1% Total Assets 167,612 196,903 222,446 260,292 Opex/Total Assets (On+Off) 2.4% 2.5% 2.4% 2.4% Off Balance Sheet Assets 24,860 14,279 16,335 19,452 PPOP/Total Assets (On+Off) 4.0% 3.7% 3.6% 3.7% Total Assets (incl. Off B/S) 192,472 211,182 238,781 279,744 Provisions/Total Assets (On+Off) 0.5% 0.3% 0.5% 0.5% PAT/Total Assets (On+Off) 2.4% 2.3% 2.2% 2.2% Shares outstanding (mn) 111 111 111 111 Valuation Current market price (Rs.) 1,365 1,365 1,365 1,365 Book Value per share (Rs.) 268 307 337 374 Market capitalization (Rs. mn) 151,657 151,657 151,657 151,657 Adj Book Value per share (Rs.) 262 299 326 362 Earnings per share (Rs.) 40.9 42.6 44.5 52.0 P/ABV (x) 4.8 4.6 3.8 3.0 Dividend per share (Rs.) 10.50 11.00 12.00 13.00 P/E (x) 23.1 21.2 19.0 15.1 Page 3
Spark Disclaimer Rs. 2000 1500 1000 500 Sundaram Finance 3 Year Price and History Report Date Price Reco. 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 Feb-13 Aug-13 Feb-14 Aug-14 Jan-15 Jul-15 Jan-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 Stock expected to provide positive returns of >15% over a 1-year horizon ADD 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 4
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 5