MOSL: SHRIRAM CITY UNION FINANCE (Buy)-Investing in 2W financing business-Other segments stable

Shriram City Union Finance: Investing in 2W financing business; Other segments stable

(SCUF IN, Mkt Cap USD2.1b, CMP INR2052, TP INR2500, 22% Upside, Buy)

• 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 probably GST on SCUF’s traditional customer segment. Disbursements in gold finance were also modestly below the quarterly trend of the past few quarters.
• However, it is commendable that SCUF has been able to maintain yields, despite intensifying competition in almost all segments it operates in – calculated yield on AUM was flat QoQ and YoY at 21%. With CoF falling 20bp sequentially this quarter, there was some respite on margins.
• Due to the strong push in the 2W segment, the company incurred elevated opex in the quarter. Opex grew 30% YoY to 21% of sales, above our estimate. We await management clarity on the trend, going ahead.