Buy This Mid Cap NBFC Stock For Target Price Of Rs 2,490: Axis Securities

The brokerage firm Axis Securities has given a "buy" rating to Sundaram Finance Ltd. (SUF), a mid-cap NBFC (Non-Banking Finance Company). The brokerage maintained the buy call with a revised target price of Rs 2,490 apiece. Considering the estimated target price if investors buy the stock of the company at the Current Market Price (CMP), they are likely to get 11% potential gains.

Stock Outlook

On NSE, the Current Market Price (CMP) of SUF is Rs 2,255.35 apiece. The stock's 52-week low is Rs 1,555 apiece recorded on 30 May 2022, and the 52-week high is Rs 2,610 apiece recorded on 15 September 2021, respectively.

 

Returns on Investments

The stock over the past 1 week has given 5.24% positive return. Whereas, in the past 1 month, it gave 8.6% positive return. In the past 3 months, it has given a 23.47% positive return. Over the past 1 year, it gave a negative return of 12.42%. The stock in the past 3 years gave a positive return of 48.03% and in the past 5 years, it gave a positive return of 29.99%, respectively.

Broad Based Recovery Ahead, Robust Disbursement!

Sundaram Finance's (SUF) management referred to an overall muted performance in the economic activity for Q1FY23 was largely driven by geopolitical pressures resulting in rising oil prices and high inflationary environment coupled with rising interest rates. However, management indicated that the demand would continue to rise for the coming quarters. Overall, the management remained positive about the growth prospects of the commercial vehicle market going into FY23 and beyond. It expects broad-based recovery across all segments in the upcoming quarters and recovery to normalcy which will enable a pick-up in credit-offtake. Management growth prospects for SUF's segments of Construction Equipment, Tractor & Farm Equipment as well as Commercial Lending continue to remain bright. Demand for passenger vehicles remains strong, constrained only by supply. Management indicated current collection is at the pre covid levels and with the economy picking up collection and recovery is expected to remain strong going forward.

Q1FY23 performance

The company's Q1FY23 performance remained below our expectations with NII growing 8% YoY to Rs 531 Cr and 0.4% QoQ. PPOP registered a marginal growth of 3.4%/0.1% YoY/QoQ largely. The company reported an healthy growth rate in PAT 17.8% YoY owing to lower base of Q1FY22, however was down 24.5% QoQ due to overall subdued QOQ performance for NII and PPOP.

SUF reported highest ever first quarter disbursements at Rs 4,895 Cr (up 138 % YoY) leading to AUM growth of 2.4% YoY. G/NNPA post the impact of RBI circular stood at 5.22% and 3.83%, respectively. Barring the impact of the RBI circular on the NPA recognition, G/NNPA for Q1FY23 moderated QoQ from 2.2%/1.1% to 2.51%/1.3%. Commercial Vehicles, especially medium and heavy commercial vehicles, recovery continued in Q1FY23. Restructured pool improved QoQ to 4.07% from 4.85% and the collections in this book are holding up well. Thus, barring any unforeseen disruption, the management expects the restructured book to decline significantly as it exits FY23E. SUF remains well capitalised with Capital Adequacy Ratio at 24.1% (Tier I at 17.8%).

Valuation

According to the brokerage firm, "SUF has been conservative in building its loan book during uncertain times and we believe while this approach will help in controlling asset quality stress, overall growth will be calibrated. Despite the ups and downs in the CV cycle, the management's prudence in lending has led to otherwise consistent performance in the past resulting in strong return ratios (ROA +2.5%). We believe SUF's well-diversified secured loan mix with strong underwriting practices and comfortable capital position will support operating performance. We maintain our buy rating with a revised target price of Rs 2,490/share (based on SOTP valuation), implying an upside of 11% from the CMP."

Key Highlights - Restructured book improved

There was a significant improvement in the outstanding restructured book to Rs 1234 Cr (4.07% of loans) from Rs 1,417 Cr (4.85% of loans) in Q4FY22. Management expects continued recovery in the commercial vehicles segment, especially medium & heavy commercial vehicles.

Disclaimer

The stock has been picked from the brokerage report of Axis Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.