IDBI Capital Markets has reiterated a BUY call on Sundaram Finance Limited, citing consistent execution, resilient asset quality, and improving profitability across cycles. The brokerage has assigned a target price of Rs6,200, implying an upside of about 16% from the current market price of Rs 5,349.

Sundaram Finance: Consistency Over Cycles Defines the Franchise

Sundaram Finance’s Q3FY26 performance reinforces why the company continues to command premium valuations within India’s NBFC universe. The lender delivered steady asset growth, pristine asset quality, and improving earnings visibility, even as broader credit markets remain selective. Assets under management crossed Rs58,236 crore, supported by balanced growth across commercial vehicles, cars, construction equipment, and tractors. Profitability expanded on the back of operating leverage, disciplined funding costs, and stable yields. With conservative underwriting, strong capital buffers, and diversified funding sources, Sundaram Finance remains structurally positioned for sustainable compounding. IDBI Capital continues to value the business at a premium, reflecting durability rather than short-term acceleration.

AUM Momentum Anchored in Diversification

Assets under management reached Rs58,236 crore as of December 2025, marking a 16% year-on-year increase. Growth remained well-distributed across geographies and product categories, reducing concentration risks. Disbursements for the first nine months of FY26 rose 13% YoY to Rs24,270 crore, while Q3FY26 disbursements stood at Rs8,847 crore, up 14% YoY.

The lender’s portfolio composition continues to reflect its traditional strength in vehicle financing, while gradually expanding its footprint in commercial lending and ancillary segments. This diversified mix allows Sundaram Finance to capture cyclical upswings without compromising underwriting discipline.

Profitability Strengthens on Operating Leverage

Net profit for 9MFY26 rose 23% YoY to Rs1,226 crore, while Q3FY26 PAT stood at Rs403 crore. The earnings trajectory was supported by higher net interest income, rising fee income, and controlled operating expenses. Net interest income grew 18% YoY in Q3FY26 to Rs7,592 million, aided by a modest improvement in net interest margins to 5.34%.

While cost-to-income ratios ticked up sequentially due to seasonal expense normalization, management continues to demonstrate strong cost discipline over longer periods, maintaining one of the best efficiency metrics among large NBFCs.

Asset Quality: Still the Gold Standard

Gross NPAs remained contained at 1.9%, with net NPAs at 1.1% in Q3FY26. Collections stayed resilient, and credit costs declined sequentially, underscoring the quality of the underlying loan book. Provision coverage remains healthy at around 45%, offering comfort against potential stress scenarios.

Sundaram Finance’s conservative credit philosophy continues to differentiate it from peers, particularly during periods of macro uncertainty or tightening liquidity.

Capital Adequacy Offers Growth Headroom

The company reported a capital adequacy ratio of approximately 21%, well above regulatory requirements. Strong internal accruals and prudent balance sheet management have ensured that growth ambitions remain fully funded without dilution risk. Leverage levels are stable, supporting a sustainable return profile rather than aggressive balance sheet expansion.

This capital strength allows the lender to selectively pursue growth opportunities while maintaining pricing discipline.

Segmental AUM Mix Reflects Structural Balance

The following table highlights the diversified composition of AUM as of Q3FY26:

No single segment dominates incremental growth, reinforcing portfolio stability.

Funding Profile Remains Well-Calibrated

Borrowings rose 14% YoY in Q3FY26, aligned with AUM growth. The funding mix continues to be balanced across debentures, bank borrowings, deposits, and securitisation. Importantly, reliance on short-term commercial paper has reduced sequentially, lowering refinancing risk during volatile liquidity phases.

Cost of borrowing remained largely stable, supporting margin sustainability.

Return Metrics Normalize Without Structural Erosion

Return on equity is expected to moderate to 13.8% in FY26E before improving to 14.6% by FY28E. This normalization reflects higher capital buffers rather than weakening profitability. Return on assets remains healthy at around 2.6–2.8%, among the strongest in the NBFC space.

The gradual improvement in ROE over FY27–FY28 is expected to be driven by operating leverage and steady balance sheet expansion.

Valuation: Paying for Durability, Not Optionality

IDBI Capital values Sundaram Finance’s core business at 4.1x FY28E adjusted book value, assigning a target price of Rs6,200. The standalone business is valued at Rs5,318, with additional value attributed to subsidiaries.

While the stock trades at premium multiples, these valuations are underpinned by consistency, asset quality, and governance rather than aggressive growth assumptions.

Outlook: A Franchise Built for Longevity

The outlook remains constructive, supported by steady demand recovery, conservative underwriting, and balance sheet resilience. Market share gains across regions and asset classes, combined with disciplined pricing, position Sundaram Finance to compound earnings through cycles rather than chase short-term volume.

For long-term investors seeking stability within the NBFC space, the company continues to represent a benchmark franchise.

Key Investment Levels

Current Market Price (CMP): Rs5,349
Target Price: Rs6,200
Potential Upside: ~16%
Rating: BUY