ShriRam City Union Finance; Buy at CMP for Target price of Rs. 2332

Background: Shriram City Union Finance (SCUF), the retail finance arm of the Shriram Group, offers diversified loan products ranging from low risk (loan against gold) to high risk segments (small business loans and two-wheeler financing). Strong group parentage (three decades expertise in the finance services space) is among the key positives. The company benefits from Shriram Chits’ branch infrastructure and existing customers, deriving more than 85% of its business from Shriram Chits’ network. Shriram City operates through a wide distribution network of ~1000 branches, 600 of them are owned by Shriram City and the rest are shared with group companies.

AUM growth improves; Asset quality-stable

• SCUF, AUM growth showed improvement (16.3%YoY, 4.6%QoQ) to INR 174bn in 1QFY16 supported by growth in SME (18.5%YoY, 6.6%QoQ)) and Personal loans (55.1%YoY, 4.6%QoQ).
• Gold loans growth accelerated (39.6%YoY, 4.6%QoQ) after several quarters of weakness. However, other segments 2W (4.1%YoY) and auto loans (down 18.6%YoY) witnessed weakness. Ex-gold AUM grew ~12% YoY.
• Share of Loan against gold, 2W, Auto, Personal and SME was noted at 18%, 17%, 7%, 4% and 54% respectively.
• Overall disbursement improved YoY at 10.2%YoY and declined 9.3%QoQ amidst seasonality. Growth in disbursements was led by Personal Loans, SME & Auto disbursements grew ~2xYoY and formed 57% & 37% respectively. Ex gold, disbursements grew ~31% YoY
• Management hinted over the medium term, MSME portfolio to form ~70% & 2-W to form ~20% of loans.
• NIM declined (10bps YoY, 30bps QoQ) to 13.4% led by decline yield on assets to 21.4% amidst higher share of gold loans in incremental disbursements.
• Cost of funds was flat at 10.9% on the back increase in share of lower cost market borrowings to 13%, while the share of bank borrowings and NCDs was noted at 47% and 9% respectively. Management highlighted moderation in cost of funds in coming quarters on increased market borrowings.
• Asset Quality declined marginally to 3.38% as absolute GNPAs increased (37.8%YoY, 8.3%QoQ) to INR 5.32bn, while NNPAs was stable at 0.69% amidst increase in provision coverage to 79.5%. Management highlighted weakness in asset quality was led by MSME segment. (GNPAs at 2.62% vs. 2.5% QoQ).
• Cost/Income was elevated at 42%, owing to higher employee expenses at 46.4%YoY led by higher incentives and benefit expenses. Management highlighted growth in.
• Operating profit grew a modest 10%YoY to INR 3.41bn supported by growth in core income growth 15.9%YoY and lower provisions. Consequently, net profit grew 15.7%YoY to INR 1.47bn.
• Shriram Housing Finance AUM increased 130.9%YoY to INR 8.8bn in the 1QFY16. Net profit was reported at INR 56.8mn. Management expects the strong growth to continue through FY16 given improvement in economic environment.

Valuation:

The stock is currently trading at P/BV of 2.1X, P/E of 13.8X FY17E. Given, the stabilization of gold portfolio, improved growth in SME segment and stable asset quality, we estimate earnings to grow ~21%CAGR (FY15-17E); we assign a P/BV of 2.8X on FY17E, implying a target price of INR 2,332. We rate the stock an OUTPERFORMER.

Risks: 

Slower ramp up in loan book and any stress in the SME segment might impact earnings.