Target: ₹3,720
CMP: ₹3,740.30
Sundaram Finance reported 6 per cent q-o-q decline in disbursements due to muted growth in automotive sector and lesser than expected economic activity in Q3. Margins were impacted due to rise in CoF (down 49bps YoY and 15bps QoQ) while interest yields increased y-o-y and q-o-q.
Credit costs remained benign while asset quality parameters improved with improvement in collections and recovery activity. PAT at ₹300 crore, was up 24 per cent y-o-y, 4 per cent ahead of our estimates despite miss on NII and operating profits due to lower than anticipated credit costs. RoA/RoE for Q3-FY24 stood at 2.5/14.3 per cent as against 2.6/13.1 per cent in Q3-FY23. Tier 1 Capital/CAR remains strong at 16/20 per cent, respectively.
We build in AUM/PPOP/PAT CAGR at 21/20/20 per cent over FY24-26 and expect RoA/RoE at 2.9/17.5 per cent for FY26.
Sundaram Finance is currently trading at 4.4x FY25E P/ABV (core net worth), fairly pricing in growth and profitability. We downgrade the stock to Add post 55 per cent run-up since our initiation in May’23. We value the standalone business at 4x H1-FY26 P/ABV (₹2,886) and value subsidiaries at ₹834, post 20 per cent holdco discount, to arrive at our Target Price of ₹3,720.