M&M Finance, Shriram, Sundaram Finance - AUM Growth To Remain In Double-Digit: IDBI Capital Initiates Coverage

IDBI Capital Report

Vehicle Finance is the second largest segment in non banking financial company assets under management pie comprising of around 20-25% of the overall AUM. The segment has witnessed severe pain in the past couple of years led by asset quality issues, lower collection efficiency (due to restriction in movement of people) as well as lower demands from the industry.

Going forward, with the resumption of economic activities, the sector AUM expected to grow at a rate of 12-14% over next two year; led by pent up demand, replacement demands (resumption of schools, offices as well as intercity bus transportation), improved monsoon and growth of infrastructure activities in the country.

We initiate coverage on Shriram Finance Ltd., Mahindra and Mahindra Financial Services Ltd. and Sundaram Finance Ltd. on a positive note.

Mahindra Finance - Strong player in rural finance

Mahindra Finance, with a strong presence in the rural and semi-urban areas of India, is play on rural India. With improvement in daily wage rate for rural segment along with decline in inflation, disbursement growth expected to remain strong (management guided for 15-20% disbursement growth for FY24). Asset quality volatility historically has been the concern for the company; however management has taken steps to bring the stability over the period. Management has designed the vision 2025 to bring down GS3 below 6% (@5.9% Q3 FY23) and ~2.5% return on assets. Key Risks – Asset quality deterioration led by lower than normal rainfall in rural regions; higher inflation in rural regions.

Shriram Finance - Merger bodes well

Born out of the merger between Shriram Transport Finance Company Ltd.) and Shriram City Union Finance Ltd., Shriram Finance is one of the leaders in the used commercial vehicle finance with around ~20-25% market share. With more than four decades of experience spanning cross various cycles, Shriram Finance has been able to maintain its dominance in the used CV lending space. Post-merger, with the expertise of Shriram City Union Finance in two-wheeler and micro finance, Shriram Finance aims at diversifying its loan book with the aim of creating a one stop destination for all the financial services and credit needs of various segments of customer under a single brand name.

Key Risks – Fuel rate hike impacting the cash flow of borrowers; key shareholder risk on stock performance.

Sundaram Finance - Beneficiary of CV up-cycle

Sundaram Finance has reported superior asset quality performance over the different CV cycles as major AUM exposure comes from CV. Further, it’s a beneficiary of up move in CV cycle; expected CV cycle upturn to continue in FY24 led by infrastructure focus by the government. However, CV % has declined from 52% FY18 due to diversification into tractor (8%) and construction equipment (11%) segment. With strong leadership, Sundaram Finance has generated enough internal accruals to fund the growth of the group without raising the equity capital for more than 15 years (last equity raised in 2006).

Key Risks – CV cycle down turn could impact AUM growth; Interest rate hike by Reserve Bank of India could impact cost of funds.

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