Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Healthy asset quality and adequate earnings profile

SFL has consistently demonstrated healthy asset quality, superior to that of its peers, across economic cycles. SFL, in line with the industry, witnessed uptick in delinquencies during the pandemic with localised lockdowns impacting the borrower segment particularly commercial vehicles (CVs). However, asset quality metrics have improved since across all product segments, as seen from a reduction in gross stage 3 assets to 1.77% as on December 31, 2023 (1.66% as on March 31, 2023) from 2.43% as on December 31, 2022. Gross non-performing assets (NPAs) and net NPAs have also improved on the back of healthy collections and write-offs and stood at 2.61% and 1.82%, respectively, as on December 31, 2023, as against 3.97% and 2.78%, respectively a year earlier. SFL’s outstanding restructured book forms around 0.8% of its portfolio as on December 31, 2023.

The company has, over its existence of more than six decades, seen many business cycles and has maintained industry leading asset quality metrics in them. Strong customer relationships, prudent lending practices, appropriate credit filters and sound collection systems have been key enablers for SFL to maintain healthy asset quality across cycles. Centralisation of loan appraisals and strengthening of recovery vertical have helped improve credit practices in the mortgage finance business, and asset quality of contracts originated over the last couple of years.

Overall earnings profile has remained comfortable with a return on assets (RoA) of 2.8% for nine months period of fiscal 2024 (2.8% for fiscal 2023) as compared to 2.8% for corresponding period of previous fiscal, supported by growth and controlled credit costs. Operating expenses (as % of average of total assets) have slightly increased to 2.3% for nine months period of fiscal 2024 from 2.1% for the corresponding period of the previous fiscal on account of higher employee cost and branch expansions undertaken during the period.

Comfortable capitalisation

Capitalisation remains comfortable for the current scale of operations; with sizeable net worth of Rs 8,521 crore and capital adequacy ratio of 20.0% as on December 31, 2023 (Rs 7,737 crore and 22.8%, respectively as on March 31, 2023). Healthy cash accruals have helped SFL support capital requirements of its subsidiaries. Adjusted gearing stood stable at 4.7 times as on December 31, 2023 (4.2 times as on March 31, 2023) and remains comfortable.

Strong management

SFL is the only non-banking financial company (NBFC) in India, with a track record of over six decades in the commercial vehicle (CV) financing business. The management's experience and understanding of the retail asset backed financing businesses has enabled the group to withstand multiple business cycles. The management is likely to maintain a conservative and prudent approach towards risk management. Assessment of the group's credit risk profile continues to factor in the group's strong management capabilities, as a key rating parameter.

Weakness:

Moderate market position of the Sundaram Finance group in most operating segments

The group has a moderate presence in the overall retail financing space and remains a mid-sized player on a pan India basis. Sundaram Finance group’s assets under management (AUM) registered a healthy 25% growth and stood at Rs 55,145 crore as on December 31, 2023 from Rs 44,122 crore as on December 31, 2022. The company holds a sizeable market share in the CV financing segment in southern India. It has also steadily increased its presence in the car financing segment, which forms almost 24.7% of the portfolio currently. SFL’s overall disbursements increased by 28% year-on-year (y-o-y) to Rs 23,513 crore in 9MFY24 from Rs 18,404 crore in 9MFY23. Yet, SFL remains a relatively smaller player in the vehicle financing segment, as it is dominated by some private sector banks. While the group's presence in the housing finance and asset management businesses has helped it diversify its business profile to some extent, scale of operations of these businesses may remain modest over the medium term. Even as the group remains exposed to downturns in the CV industry, and increasing competition in the retail financing space, it has a demonstrated track record of withstanding multiple economic cycles.