|Fixed deposit programme||FAA+ Reaffirmed|
|Rs 3000 million short-term debt programme||P1+ Reaffirmed|
The rating reaffirmation of Sundaram Finance Ltd (SFL) reflects the companys favourable market position in the commercial vehicle finance business, its diversified business profile and the improving and good asset quality of its vehicle financing operations. In addition, SFL has a favourable financial profile on account of its strong resource-raising ability and comfortable capital position. The rating is, however, tempered by the companys lower profitability and the challenges it faces in terms of improving this profitability and maintaining its market share amidst the growing competition. The successful outcome of the companys strategic investments in businesses like housing finance and insurance would be a key driver of its future profitability and capital requirements.
Favourable market position in commercial vehicle financing: SFL has a strong market position in the truck financing business on account of its over four decade-long track record, large customer base and extensive branch network. The company disbursed Rs 7 billion in this segment in 2001-2002 against Rs 5.07 billion in the previous year, registering a 38 per cent growth. SFL also has a good presence in the used commercial vehicles segment, where the company disbursed Rs 888 million during 2001-2002.
The competition in the commercial vehicle financing business has, however, intensified. But given its large customer base and existing relationships with borrowers, Crisil expects SFL to maintain its market position and sustain its pricing premium to some extent in the future.
Good asset quality: The companys asset quality has improved over the years on account of its stringent credit norms and the reduced focus on the plant and machinery (P&M) segment. Its overall gross non-performing assets (NPA) have declined from 6.14 per cent as at March 31, 2001, to 4.71 per cent as at March 31, 2002. A majority of these NPAs are, however, historical and originated from the P&M and mortgages segments. SFL has been consciously reducing its focus on P&M disbursements and these accounted for only 4.5 per cent of its total disbursements in 2001-2002.
Going forward, SFL would only focus on the retail vehicle financing segment. The asset quality in SFLs continuing operations, that is its commercial vehicle and car financing business is good, with gross NPAs of 1.5 per cent and 0.4 per cent respectively as at March 31, 2002. The managements stated policy of exiting the mid-sized corporate P&M segment, where NPAs have been high, should help in improving its collection efficiency and the asset quality of its overall portfolio in future.
Well-diversified, stable and low-cost resource base: SFL has a diversified resource base in the form of fixed deposits, bank borrowings and borrowings from mutual funds. SFL has a strong retail base of Rs 7.53 billion comprising over 0.5 million depositors. This large depositor base, coupled with its good brand equity, enables SFL to raise funds at a low cost. Moreover, the high renewal rate of over 75 per cent lends a great deal of stability to the companys resource profile. In addition, active treasury management has resulted in a reduction in borrowing costs to 10.83 per cent in 2001-2002 from 12.02 per cent in 2000-2001. The companys asset-liability maturity profile is fairly comfortable as well. Crisil expects SFLs strong resource-raising ability to be a key source of comfort in future too.
Comfortable capital position: The companys capital position is comfortable with a high capital adequacy ratio of 18.26 per cent and a networth of 4.36 billion as at March 31, 2002. Both the reported networth and capital adequacy have come down over the previous year primarily on account of the deferred tax liability created during 2001-2002. Crisil expects SFLs capital position to remain high in future as well since the management has not planned any large strategic investments. Thus, it will continue to support SFLs strong financial risk profile.
Continuing pressure on profitability: SFLs overall profitability continues to be under pressure on account of the high level of write-offs, non-income yielding strategic investments and declining spreads on account of increased competition.
The company reported a profit after tax (PAT) of Rs 403.6 million in 2001-2002 with a return on networth of 9.6 per cent. For the nine months ended December 31, 2002, the company reported a net profit of Rs 335.6 million, registering an increase of 18 per cent over the levels reported in the same period in 2001-2002.
While the companys core profitability is good with a net profitability margin of 3.27 per cent in 2001-2002, SFL wrote off Rs 180 million on account of bad debts pertaining to corporate lending in the P&M segment. Its overall profitability has also been hurt by its investments in housing finance, insurance and other joint ventures, which are not generating any income at present. The companys ability to generate returns from these investments will have a crucial bearing on its future profitability.
Going forward, SFLs profitability is likely to improve due to lower write-off levels after cleaning up the existing P&M NPAs. The return on networth is expected to move up to around 11 per cent in the medium term. Further, the generation of fee-based income will also improve the companys overall profitability in future.
Increasing competition: Competition in the retail asset financing business has heightened especially from banks whose lending rates are lower than that of non-banking finance companies (NBFC).
Therefore, the company faces the challenge of maintaining its market position in such a scenario. SFL, however, continues to enjoy a strong market position in the retail financing business on account of its extensive branch network and large customer base. Crisil expects these strengths to lend stability to the companys business though yields are expected to remain under pressure.
SFL commenced operations in 1954 as a wholly-owned subsidiary of Madras Motor Insurance Company Ltd, a member of the TVS group of companies.
SFL group is in the business of asset financing, bill discounting, asset management, insurance and housing finance. Within asset financing, SFL mainly finances commercial vehicles and cars.
The company disbursed Rs 12.49 billion in 2001-2002. SFL has a large network of 127 branches spread across the country. SFLs historical performance has been characterised by steady growth emanating from internal accruals. The company is fairly conservative in its business transactions.
SFLs subsidiaries include Sundaram Newton Asset Management Company Ltd (asset management business), Sundaram Home Finance Ltd (housing finance) and Sundaram Finance Securities Ltd (distribution).
SFL holds a 49 per cent stake in the joint-venture company, Fiat Sundaram Auto Finance Ltd (FISAF), which finances only Fiat cars. SFL also has a 49.5 per cent stake in the insurance joint venture, Royal Sundaram Alliance Insurance Company Ltd, which commenced operations in March 2001. UK-based Royal and Sun Alliance Insurance PLC has a 26 per cent in this venture.
The company has set up two strategic business units: Sundaram Infotech Solutions (SIS) and Sundaram Business Services (SBS). SIS is an IT service provider for the group and outside customers. SBS is in the business of business process outsourcing. During 2001-02, these units generated a gross fee-based income of Rs 55 million.
The restructuring in the NBFC industry saw the exit of several marginal players leaving behind a handful of strong players. Today, the industry comprises large Indian companies and companies backed by either a large group or a multinational parent. In this consolidating scenario, cost of funds, ability to capitalise at regular intervals, business origination capabilities and efficient recovery systems would be the key factors determining the performance of players in the industry.
Rating Sensitivity Factors
SFLs ability to maintain its market position, interest spreads and asset quality amidst the high degree of competition in the asset financing business will have a bearing on its future risk profile.
The performance of the insurance and asset management businesses will have a bearing on the companys future profitability and capital position.