Sundaram Finance AUM growth accelerates as collections improve asset quality

Investment View and Valuation

In its May 26, 2026 Q4 FY26 result update on Sundaram Finance, Prabhudas Lilladher maintained its ACCUMULATE recommendation. The broker remains favourable on the company because of the pickup in disbursements and AUM growth, stable margins and improving asset quality.

Prabhudas Lilladher expects AUM growth of 14 per cent in FY27E and 15 per cent in FY28E. It expects NIM to remain stable, as lower lending yields are offset by controlled cost of funds. The broker reduced its target price to Rs 4,900 from Rs 5,500 while rolling the valuation forward to FY28.

Disbursements and AUM Growth

Sundaram Finance reported Q4 FY26 disbursements of Rs 80,510 million, up 17.1 per cent year on year. AUM rose 16.4 per cent year on year and 2.9 per cent sequentially to Rs 599,080 million.

Demand and macroeconomic activity were somewhat muted in H1 FY26 because of trade-tariff-related complications. Conditions improved in H2 FY26 with monetary-policy transmission and fiscal-policy stimulus. Growth was led by MHCV, cars, retail CV, construction equipment, tractors, and commercial lending and other businesses.

The Q4 AUM mix comprised 43.5 per cent CV, 24.6 per cent cars, 10.6 per cent construction equipment and 7 per cent tractors. Construction-equipment conditions remained muted, with backhoe-loader volumes falling 7 per cent year on year. Prabhudas Lilladher has assumed somewhat lower growth because of rising fuel costs and an anticipated slowdown in economic activity.

Margins and Q4 FY26 Financial Performance

Q4 FY26 NII was Rs 7,847 million, up 18 per cent year on year and 3.4 per cent quarter on quarter, and 2 per cent above Prabhudas Lilladher's estimate. Calculated NIM was broadly flat sequentially at 5.61 per cent. Cost of funds declined 26 basis points quarter on quarter to 6.97 per cent, while yield fell 33 basis points to 11.63 per cent.

Operating expenses increased 17 per cent year on year and 6 per cent sequentially. However, the cost-to-income ratio improved to 26.7 per cent from 29.7 per cent in Q3 FY26. The company recorded a Rs 750 million impact from new labour codes during FY26.

Asset Quality and Credit Costs

Asset quality improved materially in Q4 FY26. Gross Stage 3 and net Stage 3 declined to 1.44 per cent and 0.69 per cent, respectively, from 1.91 per cent and 1.06 per cent in Q3 FY26. RBI-reported GNPA and NNPA improved to 2.14 per cent and 1.27 per cent from 2.69 per cent and 1.73 per cent sequentially.

Management commentary indicated that asset-quality pressure was relatively high in H1 FY26 but stabilised in H2 FY26 as economic activity and cash flows improved. Improved recoveries, collections and tighter origination standards supported GNPA improvement across segments. Provision coverage was 53 per cent and capital adequacy was 19.1 per cent at Q4 FY26. Prabhudas Lilladher expects credit costs to normalise.

Subsidiary Performance

Sundaram Home Finance

Sundaram Home Finance's AUM grew 14 per cent year on year to Rs 199 billion, although disbursements declined 2 per cent. Its non-housing loan mix reached 55 per cent, compared with 51 per cent in Q3 FY25. GNPA and NNPA improved to 1.1 per cent and 0.5 per cent, respectively.

Royal Sundaram

Royal Sundaram's gross written premium grew 14 per cent to Rs 12.5 billion. However, it reported a Rs 530 million loss and a 109 per cent combined ratio.

Sundaram Asset Management

Sundaram Asset Management's average AUM grew 8 per cent to Rs 774 billion, while PAT increased 2 per cent to Rs 470 million.

Estimates and Sum-of-the-Parts Valuation

Prabhudas Lilladher marginally lowered its FY27E and FY28E NII estimates by 2.4 per cent and 2.1 per cent, respectively. It raised PAT estimates by 0.4 per cent for FY27E and 1 per cent for FY28E.

The sum-of-the-parts target price of Rs 4,900 comprises Rs 3,978 per share for the standalone business, valued at 2.6 times March 2028 adjusted book value, plus values for subsidiaries and associates. The subsidiary valuation includes Sundaram Home Finance at 1.5 times FY26 net worth, Sundaram Asset Management at 10 per cent of last reported AUM, and Royal Sundaram on the last-transaction basis, followed by a 20 per cent holding-company discount.