Sundaram Finance Holdings

Sundaram Finance Holdings Limited (SFHL) is part of the reputed TVS Group and operates as a holding company. SFHL generates a significant portion of its income from dividend flows from the portfolio companies that are engaged in the automotive sector. SFHL‘s net-worth stood at ₹1240 crore as on 31.03.2020.

Sundaram Business Services Limited (SBSL) is a BPO business wholly owned by SFHL. SBSL has 559 employees and 50 clients in India, Australia, the USA and the UK.  SBSL earned a revenue of ₹40.77 crore and a profit after tax of ₹3.26 crore.

SFHL has made the following portfolio investments:
– 2.5% stake in Wheels India for ₹33.3 crore.
– 3.3% stake in Fettle Tone for ₹20.87 crore for the purpose of making an investment in Max Bupa Health Insurance.

Investment Portfolio (as on 31.03.2020):

SFHL Portfolio

Turbo Energy Private Limited (TEPL)  is the leading manufacturer of turbochargers and turbocharger parts in India. SFHL holds 32% stake in TEPL.  Borgwarner Turbo Systems (Germany), Brakes India Private Limited, and SFHL are the promoters of the company. 

India Motor Parts and Accessories Limited (IMPAL) is the largest distributor of automotive spare parts and equipment in India. SFHL holds 18.59% stake in IMPAL.

Brakes India Private Limited (BIPL) is the market leader in the manufacture of braking systems for cars and commercial vehicles in India. SFHL holds 6.67% stake in BIPL. TRW Automotive (part of ZF Group), the TVS Group, and SFHL are the promoters of the company.

Dunes Oman LLC (FZC) operating in Oman, is engaged in the manufacture of iron castings for the automotive industry. SFHL holds 43.69% stake in FZC.  BIPL and SFHL are the promoters of the company.

Sundaram Clayton Limited (SCL) is engaged in the manufacture of precision aluminum cast products for both automotive and non-automotive applications. SFHL holds 11.24% stake in SCL. The TVS Group and SFHL are the promoters of the company.

Flometallic India Private Limited (FIPL) is engaged in the manufacture of iron castings for the automotive industry. SFHL holds 40.63% stake in FIPL.

Wheels India Limited (WIL) is the leading manufacturer of wheels and air suspension components for cars and commercial vehicles in India. SFHL holds 13.58% stake in WIL. Titan Limited, the TVS Group, and SFHL are the promoters of the company.

Axles India Limited (AIL) is a leading manufacturer of axle housings for medium and heavy commercial vehicles in India. SFHL holds 38.81% stake in AIL. Dana Corporation (USA), WIL, and SFHL are the promoters of the company.

Lucas-TVS Limited (LTL) is engaged in the manufacture of auto electrical equipment. SFHL holds 5.32% stake in LTL. The TVS Group and SFHL are the promoters of the company.

Delphi-TVS Technologies Limited engaged in the manufacture of diesel fuel injection equipment for passenger vehicles, commercial vehicles and tractors. SFHL holds 3.19% stake in Delphi-TVS. Delphi Automotive Systems, the TVS Group and SFHL are the promoters of the company.

Investors:

– Promoters hold 52.9% of the company
– MFs hold 7.6% of the company
– RK Damani holds 1.7% of the company
– In Aug 2019, Super Investor Govind Parikh’s son Chinmay Parikh bought 8.88 lakh shares at ₹73.64 per share.

Source: Annual Report

Valuation:
July 15, 2020: SFHL’s market cap is around ₹765 crore and the book value is ₹123. SFHL is trading at 62% discount to its reported Net Asset Value (NAV).

Investors can focus on holding companies that have good promoters, hold good quality companies, and consistently pay out dividends.

Generally holding companies trade at a discount of 50% to 80% in India. The discount usually widens in a rising market as the underlying companies move up.

A higher discount rate implies greater uncertainty, higher return potentials, and a good value investment. Investors can buy holding companies when the discounts are high, and reduce them when the discounts are low.

Management:
TVS Group is a Gold standard for quality of management.

Dividend:
SFHL paid a total dividend of ₹1.25 per share, translating a dividend yield of 2.5%. We prefer Holding Companies with high dividend yield.

Risk:
SFHL‘s quality of holdings is reasonably good, but mostly tied to the auto industry. The Indian auto industry is already facing tough times due to COVID-19. There is no crystal ball to say when the demand will pick up. Any impact on the auto industry will impact the profitability of SFHL.

Conclusion:
Investors may have to wait for a longer time (3-5 years) to realise the value of the underlying companies.

There may be a potential value unlocking:

July 9, 2020: TVS Group set to announce restructuring of holding company
Read more at: http://timesofindia.indiatimes.com/articleshow/76862320.cms

Aug 18, 2020: SFHL has entered into a strategic partnership with the Italy-based MIND, an automotive component manufacturer in the composite materials space. Composites are high-strength materials for lightweight vehicles, and used in electric, motor sport and luxury vehicles. Weight reduction is becoming more and more important in the whole automotive and industrial domains.

Disclosure: Invested. Not a recommendation to buy or sell.

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