Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Healthy asset quality

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, as seen from a reduction in gross stage 3 assets to 1.86% as on September 30, 2023 as compared to 1.66% as on March 31, 2023. Further, under the Reserve Bank of India’s (RBI) August 2020 and May 2021 Resolution Frameworks for COVID-19-related Stress, SFL has restructured around 1.1% of its portfolio as on September 30, 2023. Post implementation of the revised recognition norms under RBI’s November 2021 Circular, gross non-performing assets (NPAs) and net NPAs stood at 2.89% and 2.06%, respectively, as on September 30, 2023, as against 4.29% and 2.97%, respectively a year earlier.

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.

Comfortable capitalisation

Capitalisation remains comfortable for the current scale of operations; with sizeable net worth of Rs 8,219 crore and capital adequacy ratio of 19.9% as on September 30, 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 4.6 times as on September 30, 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 24% growth and stood at Rs 52,438 crore as on September 30, 2023 from Rs 42,157 crore as on September 30, 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% of the portfolio currently. Yet, SFL remains a relatively smaller player in this 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.