Sundaram Finance Target price (INR) 452 Momentum in loans sustains, upgrade to Hold ::Avendus

The higher‐than‐expected growth in the NII was driven by an
improvement in NIMs along with continued momentum in aggregate
loans. Calculated NIMs improved c30‐bp q‐o‐q to 7.4%, likely to have
been led by a rising proportion of used vehicles in the overall loan mix.
The proportion of used vehicles may not rise beyond current levels in
the near term, as per the management; consequently, the rise in NIMs
may not sustain. We forecast stable NIMs at a three‐year mean of 6.9%
over FY13f–FY15f. The marginal uptick in GNPLs from 0.78% at Sep12‐
end to 0.88% at Dec12‐end is unlikely to be alarming. We raise our
earnings by 2%–5% over FY13f–FY15f, driven largely by higher
disbursements and consequently loans. We raise our Dec13 TP to
INR452 and upgrade to Hold. Slowdown in loans & high NPLs are key
risk factors.
Strong NII growth driven by sequential improvement in spreads
A c20‐bp improvement in spreads was aided by a 50‐bp sequential expansion in
the yields. Combined with a 5% q‐o‐q loan growth drove a 24% y‐o‐y NII
expansion, higher than expectations. Used vehicles now constitute c13%, while
cars and new CVs continue to be the dominant segments at 34% and 53% of
overall loans, respectively. We raise our disbursement forecast from a CAGR of
14% to 16%, while aggregate loans are forecast to increase at a CAGR of 18%
over FY13f–FY15f.
Improvement in NIMs may not sustain
NIMs improved c30‐bp q‐o‐q to c7.4%, likely to have been driven by a rising
proportion of used vehicles in the overall loan mix. The proportion of used
vehicles may not rise beyond the current levels as per the management;
consequently, the rise in NIMs may not sustain. We forecast stable NIMs at a
three‐year mean of 6.9% over FY13f–FY15f.
Marginal uptick in NPLs, though not alarming
GNPLs, as a proportion of aggregate loans, increased from 0.78% at Sep12‐end
to 0.88% as at Dec12‐end. We project incremental gross NPLs at 0.6% of loans
and loan‐loss provisions to average loans at a mean of 0.3% over FY13f–FY15f.
Raise earnings by 2%–5%, upgrade to Hold
We raise our FY13f–FY15f earnings by 2%–5%, led by higher disbursements and
loans. The stock has underperformed the Bankex by 6% and the NBFC Index by
10% over the past three months. Valuations at 2.6x one‐year fwd P/B still
appear rich. The Dec13 TP is raised to INR452 and we upgrade to Hold.

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