Disbursement growth is not a priority in current market conditions- MD, Sundaram Finance.

Update on the Indian Equity Market:

On Monday, NIFTY took a hit and declined 1.9% due to escalation in US-Iran tensions. India is highly dependent on crude oil imports and the market is worried about a rise in crude oil prices and the resultant rise in inflation. Among the sectoral indices, the worst hit were NIFTY PSU BANKS (-4.3%), NIFTY METAL (-2.9%) and NIFTY BANK (-2.6%). No sector closed in the green. Among NIFTY50 stocks, SBIN (-4.6%), BAJFINANCE (-4.5%) and VEDL (-4.5%) were the worst hit. TITAN (+1.5%), WIPRO (+0.3%) and DRREDDY (0.04%) were among the very few gainers.

Disbursement growth is not a priority in current market conditions- MD, Sundaram Finance.

Excerpts from an interview with Mr TT Srinivasaraghavan – MD, Sundaram Finance. The interview aired on CNBC TV18 on 2^nd January 2020.

• Being a vehicle finance lender, Sundaram Finance has been impacted due to the demand slowdown across the auto sector.
• Mr Srinivasaraghavan says there is no underlying reason for the demand situation to change as far as CVs, especially MHCVs, are concerned. He does not see any green shoots as of now. Some green shoots might be visible 3QFY21 onwards.
• There is little bit of replacement demand for buses by municipalities and state governments. Not so much improvement on the Infrastructure front.
• Infrastructure was the engine that drove the economy for the last 5 years and everyone had hoped that would continue. Expected action on the infrastructure front by the government hasn’t happened. If the FM’s recent announcement of Rs 102 tn infrastructure projects kicks off, then there could be some serious projects coming up that would trigger buying.
• Sundaram Finance’s disbursements in 1HFY20 were 1.5% lower YoY compared to 15.5% growth YoY in 1HFY19.  Mr Srinivasaraghavan says that disbursement growth is not in the top 3 priorities in current conditions. With PVs down 18% YoY, MHCVs down 52% YoY and overall CVs down 22% YoY, now is not the time to chase growth. Maintaining robust portfolio quality and maintaining healthy margins are the priorities. These are turbulent times and one must fasten their seatbelts and hang on.
• Sundaram Finance has seen a significant lowering in the cost of funds compared to a year-ago period.  Their market share has also improved, partly due to liquidity issues faced by some players. But even though the market share has improved, the market size itself has shrunk.
• Sundaram Finance’s asset quality has deteriorated from GNPAs of 1.3% at the end of 4QFY19 to 2.2% as of the end of 2QFY20. Mr Srinivasaraghavan does not think the asset quality will improve dramatically in the near term although it will go back to more reasonable levels eventually.
• NPA is a fair reflection of the stress the customers are facing. Transport operators are facing enormous stress due to a combination of overall economic factors such as projects not happening, terrible freight rates, state government pulling the plug on already running or awarded projects.  The operators will need 6-9 months for them to get out of this pressure on cash flows. The best that the company can do is to nurse the customers through this difficult period even if the asset quality is what it is.
• Sundaram Finance has seen a small element of pre-buying from some larger customers in the last weeks of December. Mr Srinivasaraghavan’s suspicion is that they are coming up for replacement in the next 3-6 months and that’s why they are buying now when they can better negotiate the BS-IV prices. Also perhaps there are specific sectors where customers are seeing some green shoot. But green shoots all around is not the case yet.

Consensus Estimate (Source: market screener and investing.com website)

• The closing price of SUNDARMFIN was ₹ 1,611/- as of 06-January-2020. It traded at 3.1x / 2.8x / 2.6x the consensus Book Value for FY20E / 21E / 22E of ₹ 514/ 582/ 623 respectively.
• Consensus target price of ₹ 1,826/- implies a Price to Book multiple of 2.9x on FY22E Book Value of ₹ 623/-.