Shriram City Union Finance Ltd. share price target

Maintain BUY with TP of Rs 2,254 (2.25x Mar-20E ABV of Rs 1,102). As expected, SCUF delivered a steady set of numbers with sustained business momentum (AUM up ~21% YoY), a bounce back in NIMs (13.2%, +110bps QoQ) and a dip in provisions (-48% QoQ). Further, SCUF persisted with a higher PCR (~62%), an added positive.

About 18 months ago, post consultation with McKinsey, SCUF rolled out a standardized pattern of MSME loan sourcing across geographies. However, the management is waiting for one full cycle to complete (three years) before altering any credit cost guidance. In addition, this new model is expected to help scale up the MSME loan book in non-South geographies. Currently, To prevent customer migration to competition after a loan cycle, the management has decided to reduce the interest rate for existing MSME borrowers by 200bp in the subsequent cycle. However, existing borrowers come with nearly nil incremental sourcing cost as well as lower probability of defaults. Sourcing activity generally happens from the 1 of the month. Incentives are paid to executives only if they disburse at least three loans per month. Branch managers can deviate from the output of the new sourcing model (the McKinsey model) provided they get an approval from their seniors.

Maintain BUY with TP of Rs 2,527 (2.5x Mar-20E ABV of Rs 1,011) SCUFs 4Q results were bogged down by the shift to 90DPD. Higher provisions (2x sequentially) led to a significant miss on net earnings (~Rs 470mn vs. an estimate of ~Rs 1.6bn). Opex also jumped (~15% YoY) primarily driven by higher staff costs (32% YoY) as SCUF built up higher bench strength. Additionally, the dip in NIMs (~230bps QoQ to 12.1%) was owing to yield pressure (-240bps to ~18.6%). High PCR (~62) despite the shift to 90DPD was heartening.

Operating Income fell by 7.12% to Rs. 1242.79 Cr in Q4FY18 when compared to the previous quarter. Shriram City Union Finance Ltd Q4FY18 results Comment

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....

SCUF reported PAT of INR470m for 4QFY18, much below our estimate.This was largely driven by higher provisioning expenses. PPoP grew 14%YoY (3% miss) to INR4.9b. Disbursements grew 6% YoY to INR66b. MSME disbursements grew 30%YoY to INR31b, which reflects a breakout from the range-bound levels ofINR23b- 25b in the last 7-8 quarters. Likewise, disbursement growth of40%+ YoY in the 2W segment was a key positive. AUM grew 19% YoY to INR274b, though we note the repayment rate falling to 20% (-500bp YoY). We also note that the repayment rate in MSME financing has dropped from 73% to 60% over FY16-18.

We have a BUY with a TP of Rs 2,441 (2.5x Dec-19 ABV of Rs 977). We attended the SCUF analyst meet and were positively surprised by the abundance of disclosures. We sense this was the first step towards a perception change the mgt is working on. The commentary clearly outlines SCUFs strategy of (1) consolidating leadership in core segments of 2W and MSME, (2) reducing credit costs through better underwriting, (3) ramping up cross sell, (4) leveraging branches to capture untapped opportunities and (5) focus on granularity while increasing geographical diversification.

Shriram City Union Finance's (SCUF) 3QFY18 PAT grew 34% YoY (adj. for one-time gain on sale) to INR2.11b, 4% ahead of our estimate of INR2.0b.However, PAT belies the modest core operating performance. PPoP (excl.one-time gain) was up only 14% YoY, missing estimate by 6%. While disbursements in most segments were in line with past trends, we note of a strong pick-up in 2W disbursements (36% YoY, 55% QoQ). We believe this is a conscious strategy by management to focus more on this segment to maintain its leadership position. Disbursements in MSME financing were INR24b, in line with the trend of INR23-25b in the past four quarters. The sluggish trend reflects the lingering impact of demonetization and GST on SCUF's traditional customer segment.Disbursements in gold finance were also modestly below the quarterly trend of the past few quarters.

SCUFs Q2FY18 PAT (~Rs 2 bn; down 3% YoY), below our and Street estimates, was dented by higher than expected provisions. Asset quality deteriorated marginally with 15 bps QoQ rise in 120dpd GNPA ratio to 6.9%.

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....