Sundaram Finance AUM growth accelerates as margins remain range-bound

Investment View and Target Price

In its August 4, 2026 Q1FY27 result update, Prabhudas Lilladher retained its ACCUMULATE recommendation on Sundaram Finance and raised its target price to Rs 5,070 from Rs 4,900. The broker expects stronger vehicle-finance originations to support 17 per cent AUM growth in FY27E and 16 per cent in FY28E. Margins are expected to remain broadly stable despite some asset-quality deterioration.

Prabhudas Lilladher slightly increased its FY27E and FY28E estimates to reflect the pickup in growth and controlled cost of funds and operating expenses.

Q1FY27 Operating Performance

Sundaram Finance reported Q1FY27 disbursements of Rs 8,947 crore, up 22.4 per cent year on year, aided by materially stronger auto-sector volumes. The company reported its highest-ever first-quarter sales across key vehicle categories, contrasting with the flat to declining industry environment in Q1FY26.

AUM increased 16.9 per cent year on year and 4 per cent sequentially to Rs 62,275 crore. Growth was led by commercial lending and other assets, followed by cars, tractors, construction equipment, MHCV and retail CV.

Income Growth and Margin Outlook

Q1FY27 net interest income rose 16.6 per cent year on year and 0.9 per cent quarter on quarter to Rs 792 crore, exceeding Prabhudas Lilladher's estimate by 1.6 per cent. PPOP rose 9.9 per cent year on year to Rs 788 crore, 9.3 per cent above the broker's estimate, while PAT rose 21.7 per cent to Rs 522 crore, 7.4 per cent above estimate.

Calculated NIM compressed 18 basis points sequentially to 5.43 per cent as yields declined 19 basis points to 12.1 per cent and cost of funds increased 12 basis points to 6.96 per cent. Operating expenses grew 18 per cent year on year and 5 per cent sequentially, taking the cost-to-income ratio to 29.3 per cent from 26.7 per cent in Q4FY26.

Sundaram Finance is focusing on asset-class and customer mix to optimise margins. The broker forecasts NIM of 5.4 per cent in FY27E and 5.5 per cent in FY28E, expecting lower yields to be offset by controlled funding costs.

Asset Quality and Credit Costs

Asset quality weakened sequentially in Q1FY27. Gross Stage 3 and net Stage 3 were 1.71 per cent and 0.88 per cent, compared with 1.44 per cent and 0.69 per cent in Q4FY26. RBI-reported GNPA and NNPA were 2.28 per cent and 1.35 per cent, versus 2.14 per cent and 1.27 per cent sequentially.

Prabhudas Lilladher builds credit costs of 77 basis points in FY27E and 82 basis points in FY28E, allowing for geopolitical uncertainty and a potential monsoon shortfall.

Subsidiary Performance

Subsidiaries delivered healthy operating performance during the quarter.

• Sundaram Home Finance: AUM grew 13 per cent year on year to Rs 20,330 crore and disbursements grew 10.4 per cent. However, GNPA and NNPA worsened to 1.4 per cent and 0.7 per cent, respectively.
• Royal Sundaram: Gross written premium increased 7 per cent to Rs 1,380 crore and PAT was Rs 135 crore, with a combined ratio of 116 per cent.
• Sundaram Asset Management: Average AUM grew 12 per cent to Rs 90,000 crore and PAT rose 13 per cent to Rs 51 crore. Equity-oriented schemes accounted for about 80 per cent of AUM.

Valuation and Earnings Outlook

For valuation, Prabhudas Lilladher values Sundaram Finance's standalone business at Rs 4,149 using 2.7 times adjusted book value, versus 2.6 times previously. It assigns Rs 1,152 to subsidiaries after applying a 20 per cent holding-company discount, producing the Rs 5,070 target price.