MOSL: SHRIRAM CITY UNION FINANCE (Buy)-Visible pickup in MSME and 2W segments

Shriram City Union Finance: Visible pickup in MSME and 2W segments

(SCUF IN, Mkt Cap USD2.4b, CMP INR2402, TP INR2800, 17% Upside, Buy)

• 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 of INR23b-25b in the last 7-8 quarters. Likewise, disbursement growth of 40%+ 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.
• Yields compressed 100bp YoY to 18.7%. Given intensifying competition, the management has guided to yield compression of ~50bp going forward.
• Opex grew 16% YoY, manifesting 13% growth in PPoP to INR4.9b. SCUF has 1,500-2,000 people “on the bench” currently – higher staff utilization would result in improvement of 20-30bp in the expense ratio in FY19.
• GNPL ratio increased ~220bp QoQ to 9% on transition to 90dpd. Write-offs were largely in line with the prior two quarters at INR1.7b. Management targets overall credit costs to decline to 3% in FY19. Given the overhaul in the MSME underwriting process, the MSME portfolio underwritten since April 1, 2017 has enjoyed superior asset quality compared to the past.