The bankable duo

Sanjiv Shankaran

THE year 2000-01 saw Sundaram Finance change the method if recognising income.

Consequently, its financial statement for the year is not comparable with that of the preceding year.

Sundaram Finance's operating income in 2000-01 was Rs 527 crore. The company's operating income was significantly higher by the new method of recognising income than what would have been the case had it stuck to the method used earlier. The aggregate income was Rs 533 crore.

Financial expenses comprise the major portion of a financial intermediary's outgo. In Sundaram Finance's case, it was Rs 196 crore, more or less in line with the expense incurred the previous year.

Over the last few years, the soft trend in the interest rates has kept the rise in financial charges under control. Sundaram Finance has made good use of the debt market to keep its financial cost under control. In 2000-01, it issued non-convertible debentures for Rs 215 crore, mainly to institutional investors. The debentures were issued on a private placement basis which should have helped Sundaram Finance keep issue cost under control.

The company's operating profit for 2000-01 was Rs 278 crore. The operating profit margin was 53 per cent.

Sundaram Finance's provisions and write-offs increased sharply in 2000-01, up by 71 per cent to Rs 69 crore. One reason for this may have been the merger with itself of the loss-making Sundaram Finance Services. SFSL, a subsidiary engaged in merchant banking and corporate finance, did not prove a successful line of business for Sundaram Finance. Consequently, Sundaram Finance, bought out the other partners and discontinued the merchant banking operations.

Sundaram Finance's net profit for the year was Rs 71 crore and the net profit margin was about 13.3 per cent. The earnings per share (EPS) was Rs 29.39. The financial statement over the last couple of years cannot be compared because of the mergers that have been effected. But the trends indicate that the company's disbursements in its core business of hire-purchase in automobiles has grown at a healthy rate. The growth, in relatively lacklustre market conditions, has come with a growing marketshare.

The worrisome aspect of Sundaram Finance's financials has been the growing provisions made for bad loans. To be fair to the company, the problem has not been with its core business, but with the need to write off bad investments made through its forays into corporate finance. A silver-lining has been the relatively low level of bad loans in its core business of automobile finance.

Much rides on Sundaram Finance's investments into new such areas as non-life insurance and asset management. Insurance, a joint venture with Royal Sun and Alliance, promises to be a paying investment, but that can happen only after 5-6 years. Asset management has the potential for big pay offs, but again with a gestation period.

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Sundaram Finance is still among the better financial intermediaries largely on account of its ability to get out of unsuccessful investments without a big dent on its total assets. Standard assets account for 93.86 per cent of its total business assets at the end of March 2001. The asset quality may improve if most of the incremental business goes towards its core area.

Kotak Mahindra Finance

For Kotak Mahindra Finance too the results of 2000-01 are not comparable with the preceding years because of a merger. Kotak Securities, a brokerage business, became a subsidiary of the company with effect from January 12, 2001.

Kotak Mahindra's income in 2000-01 was Rs 258 crore. It draws its strength from subsidiaries that cover a wide range of financial services -- from investment banking to securities broking. Dividend and royalty from its subsidiaries comprise an important part of their income.

Interest and bank charges came to about 37 per cent of Kotak Mahindra's income from lease, hire-purchase and financing and investment activity. With a significant portion of income coming from subsidiaries, the interest expense as a component of the total income was only about 26 per cent -- on the lower side for a financial intermediary. Kotak Mahindra's operating profit for the year was Rs 133 crore. The operating profit margin was about 52 per cent.

It is in the area of bad loans that Kotak Mahindra has made remarkable progress. Over the last two years it has been able to reduce the proportion of NPAs to a mere 0.63 per cent of its total assets. At 1.39 per cent of Kotak Mahindra's net worth, the NPAs should be among the lowest in the industry.

Its net profit was Rs 49.59 crore and the net profit margin was about 19.5 per cent of the total income. The EPS was Rs 10.17.

The company appears to be the only finance company likely to float a commercial bank. As mentioned earlier, the company draws considerable strength from its subsidiaries. Once Kotak Mahindra is able to present a consolidated balance-sheet next year or so, a clearer picture of its real strengths will emerge.