Lenders, whether banks or non-banking finance companies (NBFCs), have had it tough over the past two to three years. While banks have had to cope with anaemic credit offtake and sharp rise in delinquencies from large corporate borrowers, a few NBFCs have been able to put up a decent show given their niche focus on, say, small and medium enterprises or consumer finance business. But these companies have faced challenges elsewhere due to tightening of regulatory norms by the RBI in 2014.

One of the major changes has been the tightening of the non-performing asset (NPA) recognition norms. Earlier, loans where borrowers defaulted on their payments for 180 days or more were classified as NPAs.

With a view to bringing NBFCs at par with banks, the RBI mandated that bad loan recognition happens at 150 days by end of March 2016, 120 days by end of March 2017 and 90 days by end of March 2018. This has impacted most NBFCs that have had to make additional provisioning for bad loans, in accordance with the new norms.

But Sundaram Finance had already adopted a 120-day norm since 2012-13. In 2015-16, the company has, in fact, moved to the 90-day norm, two years ahead of the regulatory norm. Despite this, Sundaram Finance’s gross NPAs are at 2 per cent of loans, when others such as Shriram Transport Finance (at 150 days from the March 2016 quarter) and Mahindra and Mahindra Financial Services (at 120 days) have higher gross NPAs of 6 per cent and 8 per cent respectively.

The Sundaram Finance stock hence trades at a premium to its peers. At 4.2 times its one-year forward book, the stock trades nearly at par with Bajaj Finance (4.6 times), but much higher than Shriram Transport and Mahindra and Mahindra Financial Services that are trading at about 2.5 times.

But the stock has come off from its peak level of about ₹1,600 recorded last year, with valuations correcting significantly from five times. Also, given that the pick-up in commercial vehicle (CV) sales is gathering pace and the company has complied with the NPA recognition norm much ahead of time, the stock’s recent dip offers a good buying opportunity for investors with a horizon of two to three years.

Turnaround gathers pace Sundaram Finance, predominantly a CV financier, is dependent on the fortunes of the industry. From about 3.5 lakh units in 2011-12, the number of vehicles sold in the medium and heavy commercial vehicle (MHCV) segment plunged to 2 lakh units in 2013-14. But even in these times, the company has been able to beat the industry through market share gains. In 2013-14, for instance, when MHCV sales fell by 25 per cent, the company’s disbursements fell by a modest 2.7 per cent.

MHCV sales have been on the rise in the last two fiscals. After growing by 16 per cent in 2014-15, MHCV sales closed FY-16 with a strong 30 per cent growth, with volumes kissing the 3-lakh mark. For Sundaram Finance, the turnaround in the CV cycle has brought good tidings. After tepid growth in loan disbursements in the last three years, the company saw a higher 14 per cent growth in 2015-16, driven by robust MHCV sales.

Unlocking value The reforms in the infrastructure and mining sector augur well for MHCV sales. A pick-up in the economy and good monsoon, leading to higher agricultural output, should keep the momentum in CV sales going.

The continuing growth in the CV cycle should benefit Sundaram Finance. During the good days of 2009-12, the company’s disbursements grew 28 per cent annually, a testimony to its strong business model.

Sundaram Finance also has stakes in other businesses, such as home loans, mutual funds and non-life insurance, which add about ₹500 a share to the stock’s value. Royal Sundaram is one of the leading players in the general insurance space. The increase in FDI limit in the insurance sector from 26 per cent to 49 per cent has seen the sector buzzing with activity in the last one year.

There has been a spate of deals in the sector, with foreign partners upping their stakes in their joint ventures with Indian players, both in the life and non-life insurance space.

Going ahead, there could be substantial value unlocking for Sundaram Finance in its insurance subsidiary.

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