ICRA has assigned an MAAA rating to the fixed deposits programme of Sundaram Finance Ltd (SF). The rating reflects highest safety, indicating that the prospect of timely servicing of the interest and principal as per terms is the best. The rating takes into account its superior asset quality, high profitability, diversified funding base, comfortable liquidity and high financial flexibility. ICRA expects SF to retain leading market position despite adverse market conditions.

The company has developed its core competence in commercial vehicle financing. It has also significance exposure in the plant and machinery segment mainly through leasing and in private car segment both under hire purchase and leasing.

Its low cost of funds has helped it to build up a good corporate clientele and its large net worth limits the concentration risks. While SF's collection performance has declined to 90 per cent in 1997-98 from the previous level of 95 per cent, due tothe recessionary conditions in the economy, it does not adversely affect the liquidity, which remains very comfortable. The NPA levels have also increased but SF's high profitability has allowed it to absorb the more stringent provisioning as per the new norms. The company's capacity to absorb the unprovided portion of the NPAs and any further deterioration in collection performance is good on account of the large built up reserves.

The company has reported a net profit of Rs 76.6 crore for 1997-98, compared to Rs 68.7 crore in the previous year. The company accounts for its income from hire purchase by the even spread method, which has resulted in substantial hidden reserves in comparison with the capital recovery method (CRM). The even spread method has benefited the company in a recessionary phase, as it has under-recognised income (as compared to CRM) in a growing phase. Interest spreads have declined only marginally despite lower lending rates due to a corresponding fall in cost of funds. In the nextone year, the company will continue to enjoy the favourable interest rate risk with old contracts booked at highest rates still being on its books. ICRA expects the accretion to reserves to continue to remain healthy, despite adverse market conditions.

SF's strong brand image improves its accessibility to retail and institutional funds, even at a time when the sentiment towards the NBC industry is negative. ICRA draws comfort from the varied and stable funding base of the company, with long term funds accounting for 30 per cent and retails funds 37 per cent of the asset base. The substantial portion of long-tenure retail funds and the high renewal rate mitigates any mismatch in the tenures. The gearing of the company is conservative at 4 times. The hidden reserves further reduce the financial risk. The high degree of financial flexibility enjoyed by the company on account of high unutilised bank limits, low gearing, and undervalued investment portfolio and real estate are sources of comfort.