Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AAA/Stable' rating to Rs.2500 crore Non-convertible debentures of Sundaram Finance Limited (SFL). The rating on the company's other debt instruments and bank facilities have been reaffirmed at 'CRISIL AAA/FAAA/Stable/CRISIL A1+'.

 
CRISIL Ratings has also withdrawn its ratings on SFL's Non-convertible debentures of Rs 3645.9 crore (including non-convertible debentures worth Rs.75 crore withdrawn in the rationale dated May 14, 2021) and Tier II Bonds of Rs.100 crore (including tier 2 bonds worth Rs.20 crore withdrawn in the rationale dated May 14, 2021) as the same has been redeemed. (See Annexure 'Details of Rating Withdrawn' for details), in line with its withdrawal policy.

 

The ratings continue to reflect the group's demonstrated ability to maintain healthy asset quality over economic cycles, comfortable capitalisation and a well -diversified resource profile. Furthermore, the group has sustained its market share in the retail vehicle financing segment, across multiple business cycles, and is also scaling up its presence in segments, such as mortgage finance, asset management and general insurance. The rating also reflects the group's strong management and conservative risk philosophy. These strengths are partially offset by the group's moderate market position in the overall financial services space in India.

 

During the first wave of the pandemic the company had provided moratorium to its customers and collections declined during the initial months but improved thereafter. Intermittent lockdowns and localised restrictions amid the second wave of the pandemic had again impacted collections. There was a third wave of covid which had a limited impacted on the collections for the company as well as the industry. Impact of subsequent waves, if any, and any change in the payment discipline of borrowers may affect delinquency levels and will need to monitored.

 

On account of challenging macro environment, asset quality performance of SFL, in line with the industry, was also impacted. It can be witnessed from the increase in the gross stage 3 assets of the company. It has increased to 3.4% as on December 31, 2021 from 2.5% (pro-forma; excluding the impact of the Supreme Court order on the standstill in asset classification) as on December 31, 2020 and 1.84% as on March 31, 2021. Further, under the RBI’s August 2020 and May 2021 Resolution Frameworks for COVID-19-related Stress, SFL has restructured around 6.5% (Rs 1867crore) of its portfolio as on December 31, 2021. While there is an expectation of improvement in the gross stage 3 asset for the quarter ended March 2022, SFL’s ability to manage collections and asset quality will remain a key monitorable.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of SFL and its subsidiaries, together referred to as the Sundaram Finance group. This is because of high degree of operational and management integration, common promoters, and shared brand equity.

 

Please refer Annexure – List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

* Healthy asset quality

SFL has consistently demonstrated strong asset quality, superior to that of its peers, across economic cycles. However, the asset quality of the company, in line with the industry, was impacted on account of challenging macro environment, especially for the commercial vehicle industry, as the localized lockdowns had impacted the finances of the borrowers of the vehicle financiers. Gross and net stage 3 asset ratios increased to 3.4% and 2.1%, respectively, as on December 31, 2021 form pro-forma stage 3, excluding the impact of Supreme Court order, 2.5% and 1.5%, respectively, as on December 31, 2021 and 1.8% and 1% respectively, as on March 31, 2021. Further, the company has also restructured around 6.5% (Rs 1867 crore) of its portfolio as on December 31, 2021. Nevertheless, the company has, over its existence of over six decades, seen many business cycles and have maintained industry leading asset quality metrics over business cycles. 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 verticals have helped improve credit practices in the mortgage finance business, and asset quality of contracts originated over the last couple of years.

 

* Comfortable capitalisation

Capitalisation remains adequate for the current scale of operations; with sizeable net worth of Rs 6709 crore as on December 31, 2021 (Rs 6179 crore as on March 31, 2021). Capital adequacy ratio was comfortable, forming 23.6% of risk-weighted assets, as on December 31, 2021. Healthy cash accrual has helped SFL support capital requirements of its subsidiaries. Adjusted Gearing stood stable at 4.1 times as on December 31, 2021 (4.7 times as on March 31, 2021) 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. SFL’s assets under management (AUM) stood at Rs 29,796 crore as on December 31, 2021, registering a de-growth of 5% y-o-y. The company holds a sizeable market share in the CV finance segment in southern India. It has also has steadily increased its presence in the car financing segment, which forms almost 26% of the AUM currently. Yet, SFL remains a relatively smaller player in this segment, as it is dominated by few 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 these businesses may remain modest over the medium term. Though the group remains exposed to downturns in the CV industry, and increasing competition in the retail financing space, it has a track record of withstanding economic downturns.

Liquidity: Superior

Asset liability management profile was comfortable with positive cumulative mismatches in all the buckets as on December 31, 2021. The company has adequate liquidity aggregating to Rs 3426 crore in the form of cash & cash equivalents of Rs 1224 crore and unutilised bank lines of Rs 2202 crore as on April 30, 2022. Further, the company has borrowed / tied up to the extent of Rs11,293 crore from April 2021 to December 2021. Against this, SFL has upcoming repayment for the next three months of around Rs 2680 crore (excluding the maturities of WCDL/CP under consortium banks sanctioned limits) till July 31, 2022.

 

In terms of fund raising, SFL has raised around Rs 11,293 crore during April 2021 to December 2021 and continues to demonstrate ability to raise timely funds. Resource profile of the company is diversified with access to borrowings from mutual funds, scheduled commercial banks, insurance companies, retail deposits, and securitisation or assignment of assets. CRISIL expects the company to continue to be able to raise funds at competitive funding costs from diversified source of lenders and investors.

Outlook: Stable

CRISIL Ratings believes the Sundaram Finance group will continue to benefit from its healthy asset quality, comfortable capitalisation, and experienced management. The outlook may be revised to 'Negative' if asset quality or earnings profile of the group weakens significantly.

Rating Sensitivity Factors

Downward Factors

• Significant deterioration in asset quality, with gross NPAs increasing beyond 4% on a sustained basis, coupled with weakening in profitability
• Significant increase in steady-state gearing over an extended period

About the Group

Sundaram Finance, the flagship company of the group, commenced operations in 1954, as a wholly owned subsidiary of Madras Motor and General Insurance Company Ltd, a member of the TVS group of companies. Listed in 1972, when TVS sold its ownership to the public, Sundaram Finance is registered with the Reserve Bank of India (RBI) as a deposit-taking NBFC, and is classified by the RBI as Investment and Credit company. The company had a nationwide network of 612 branches and 4228 employees as on December 31, 2021. SFL’s AUM primarily consisted of Commercial Vehicles (45.7%), Car loans (25.8%), Construction Equipment (11.1%), Tractors (8.1%) and other loans (9.3%) as on December 31, 2021. Further, SFL’s overall disbursements picked up by ~13% to Rs.9,524 crore in 9MFY22 from Rs. 8,437 crore in 9MFY21

 

The group also has presence in housing finance, asset management, and non-life insurance segments. The housing finance business was conducted through a joint venture (JV) with BNP Paribas (49.9% equity stake; through BNP Paribas Personal Finance, a wholly-owned subsidiary). Post-acquisition of 49.9% stake from BNP Paribas Personal Finance in Sundaram Home, Sundaram Finance holds 100% stake in the company and has become a wholly-owned subsidiary. The asset management business is /conducted through Sundaram Asset Management Company Ltd, a wholly-owned subsidiary of Sundaram Finance. Insurance business is carried through Royal Sundaram and SFL holds 50% in Royal Sundaram General Insurance Company Ltd (RSGI) post Ageas International NV bought 40% stake in RSGI in fiscal 2019.

 

For fiscal 2021, Sundaram Finance reported total income and net profit of Rs 4014 crore and Rs 809 crore, respectively, against Rs 3,927 crore and Rs.  724 crore, respectively, for the previous fiscal.

 

Further, for the nine months ended December 31, 2021, it reported total income and net profit of Rs 2942 crore and Rs 605 crore, respectively, against Rs 2996 crore and Rs 600 crore, respectively, for the corresponding period previous fiscal.

 

The group reported total income and net profit of Rs. 5317 crore and Rs. 1223 crore, respectively, for fiscal 2021, against Rs. 4723 crore and Rs.845 crore, respectively, for the previous fiscal.

Any other information: Not applicable