Buy this NBFC mid-cap stock to gain up to 25%: HDFC Securities

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Published: October 27, 2017 3:44:59 PM

Sundaram Finance shares have gained by more than 44% in the year so far. HDFC Securities has a buy call on the shares with a target price of Rs 2,096 over a one year horizon.

HDFC Securities has a buy call on the shares of Sundaram Finance with a target price of Rs 2,096 over a one year horizon. (Image: Reuters)

Sundaram Finance shares have gained by more than 44% in the year so far. HDFC Securities has a buy call on the shares with a target price of Rs 2,096 over a one year horizon. Sundaram Finance shares closed at Rs 1,660 on NSE this afternoon. The research and brokerage firm’s target price implies an upside of more than 26% from the current market prices. Notably, the shares have beaten the Nifty Financial index which is up by 37% in the year so far.

“Sundaram Finance has seen slow growth in top and bottom line over the past three years due to its conscious strategy of conservatism in bad times. This has paid off as the NPA levels are much under control unlike a lot of its peers,” the research firm noted in its report.

Track live stock price: Sundaram Finance

HDFC Securities says that  the improvement in road infrastructure in India will drive higher sales of commercial vehicles.  According to the research firm, housing finance disbursements are showing signs of turnaround, and Sundaram Finance’s asset quality is likely to improve. Further,  the demerger of non-financial business of Sundaram Finance will help to unlock value, thereby improving valuations.

“We have valued the company on SOTP basis feel investors could buy the stock at the CMP and add on dips to Rs 1505- 1525 band (equivalent to 3.75xFY19E ABV) for sequential targets based on SOTP value discussed below of Rs 1860 and Rs 2096 in 3-4 quarters.These targets work out to 4.60xFY19E ABV and 5.2xFY19E ABV,” HDFC Securities said in its report.

Pointing to the concerns, HDFC Securities says that Sundaram Finance has a very high geographic concentration. “SFL has a high concentration in Southern India as it derives ~65% of its business from that region. Any change in the sociopolitical scenario or a natural calamity could impact its borrowers and worsen the asset quality,” noted HDFC Securities. Further, the housing finance subsidiary has seen tepid growth. “Due to increasing asset quality concerns in housing finance, the management is cautiously lending in this sector. Disbursements grew by 5% while AUM was up only 2% in FY17. The increasing share of non-housing loans is also a cause of concern and could result in higher slippages in the coming years,” HDFC Securities said in the report.    

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