Sundaram Finance: Challenges ahead

Sundaram Finance (SFL) has reported a steep 12% decline in full year revenues and a 36% drop in fourth quarter topline. However, excluding the amount of Rs 863 m, which was included in the previous year's income on account of a change in method of income recognition, total income in FY02 was higher by 6%. Consequently, financial performance of the company in FY02 is not strictly comparable.

SFL has achieved a growth of 18% in hire purchase and loan disbursements in FY02. Its gross disbursements grew at a CAGR of 20% in the last three years to Rs 12.2 bn. The company has consciously been reducing its exposure to the corporate sector, specifically to plant and machinery financing. Accordingly, leasing disbursements to this segment, which amounted to Rs 1 bn in the previous year declined to Rs 280 m in FY02. Improvement in quality of assets reduced its net NPA ratio to 2.4% of total loan assets from 4% in the previous year.

During the year, the company's cost to income ratio jumped to 40% from 28% in the previous year, due to higher establishment expenses and less than proportionate decline in interest cost. Its effective tax rate too increased to 32%, as the company provided Rs 181 m on account of deferred tax liability. Non-performing assets provisions, on the other hand, was lower as the company resorted to aggressive write-offs in the previous year, in the wake of the merger of its subsidiaries.

Among other new initiatives, SFL has entered into an agreement with SBI Life to distribute life insurance products. It has already started offering general insurance products in alliance with Royal and Sun Alliance. The company's home loan subsidiary has also booked advances worth Rs 2 bn. These new ventures are however, unlikely to contribute significantly to the company's profits in the near term.

At the current market price of Rs 133, Sundaram Finance is trading at a P/E of 8x and price to book value ratio of 0.7x. The company has traded in the average price to book value ratio of 1-1.5x in the last three years. With an aggressive entry of banks into retail financing, NBFC's are facing pressure on their business. SFL's peers including Kotak Mahindra has also reported decline in interest income. Although, NBFC's have expertise in hire purchase financing, their higher cost of funds compared to banks are trimming the growth in earnings. Consequently, it will be a tough task for SFL to improve business volumes in the coming years.