ICRA retains rating of Sundaram Finance's FD, bonds

THE INVESTMENT Information and Credit Rating Agency (ICRA) has retained the ratings assigned to the fixed deposit and medium term non-convertible debenture programmes of Sundaram Finance (SF) at MAAA. The ratings indicate highest safety over the medium term.

The rating factors in the favourable shift in asset mix of the company, improved collection performance of its contracts, its low financial risk due to moderate gearing and comfortable liquidity. The rating also factors in the continued pressure on SF's profitability due to squeeze on the lending spreads and the higher NPA provisioning. The brand image of SF, group strength and the conservative management practices and accounting policies are sources of comfort.

SF's fresh asset creation which was declining over the past three years, has improved significantly with an increased concentration in its core business of commercial vehicles and cars, and a reduction in exposure to the plant and machinery segment. There has however been an increase in operational lease of wind mills to clients with good credit quality. The steps taken by SF to improve the quality of fresh asset creation has resulted in improved collection efficiencies.

Despite improvement in collection efficiency, the provisioning burden was higher mainly due to the merger with some of its subsidiaries. However the good performance of the newer contracts is expected to contain accretion to NPAs in the future. Despite a reduction in SF's cost of funds, the pressure on lending rates resulted in a decline in interest spreads during 1999-2000. The lower profitability along with the low gearing has adversely affected the return on net worth. The pressure on lending rates and therefore on interest spreads is expected to continue in the future, with larger players including banks and FIs, competing with NBFCs in the retail segment.

SF is entering the insurance sector as a joint venture with Royal Sun of the U.K, though its initial role will be restricted to that of an investor. It has also separated its IT services as a separate profit centre, which would initially service the group companies. These measures would help SF to utilise its existing infrastructure more profitably in the long term. However, increased competition in the financial services industry is likely to exert pressure on profitability in the long term.

Corporate Bureau

Send this article to Friends by E-Mail

Section  : Business
Previous : IDBI Bank retains P1 plus
Next     : Lakshmi General Finance retains rating