EUR 120.00 For Business Accounts Only

MOSL: SHRIRAM CITY UNION FINANCE (Buy)-Seeing strength on liability side; growth momentum to sustain

Loan growth healthy; strong improvement in margins aids profitability

• SCUF posted a 1QFY23 PAT of INR3.2b, up 55% YoY and 6% QoQ (14% beat). The beat was driven by healthy NII growth of 22% YoY and benign credit costs of 2.7% (steady-state credit costs in the range of 2.5%-3.0%).
• The quarter was characterized by a healthy ~74% YoY and 5% QoQ growth in disbursements to ~INR79b. AUM grew 17% YoY/4% QoQ to ~INR346b.
• Product mix further improved in favor of personal loans (PL) and has aided yields while the ability to lower borrowing costs (despite repo rates inching up) has allowed SCUF to deliver an ~85bp sequential expansion in margins.
• Asset quality improved with GS3 declining ~20bp QoQ without having to resort to elevated write-offs.
• Ability to access multiple borrowing sources, including retail fixed deposits, has led to perceptible strength on the liability side. We maintain our BUY rating with a TP of INR2,370 (based on 1.4x FY24E BVPS).

 

Visibility on AUM growth improves further

• SCUF continued to build on the momentum and reported historically high quarterly disbursements exceeding previous highs delivered in 3Q/4QFY22.
• We model an AUM/disbursement CAGR of ~17%/21% over FY22-FY24E.

 

Asset quality at its best over the last six years; PCR healthy at 47%

• GS3 declined ~20bp sequentially to 6.1% while NS3 was stable QoQ at 3.3%.
• During the quarter, SCUF further utilized INR870m of COVID provisions and the total management overlay stood at ~INR3.4b (v/s INR4.3b at Mar'22).
• We now estimate credit costs of ~2.6% (v/s 2.8% in FY22) including gradual utilization of COVID provisions over the course of FY23-24.

Shriram Housing growing from strength to strength

• Shriram Housing (SHFL)’s AUM at INR58b, rose 8% QoQ/48% YoY, while disbursements at INR7.9b grew 260% YoY (on a pandemic-impacted base).
• GS3/NS3 declined to 1.6%/1.2% (down 10bp each QoQ), respectively.

 

Highlights from the management commentary

• Management guided for S2 to remain between 11% and 12% and credit costs at 2.5%-2.7%
• The merger has received clearance from IRDAI as well. Only CCI and NCLT approvals are pending, which it expects to receive by Sep/Oct'22.

 

Growth momentum to sustain – Maintain BUY

• Technical reasons (of a potential supply overhang) aside, the merged entity will emerge stronger than the respective standalone businesses.
• Our PAT estimate is largely unchanged with higher opex offset by lower credit costs and higher NII. Given the visibility around loan growth/credit costs, we model a PAT CAGR of 22% over FY22-FY24E and an RoA/RoE of 3.3%/15% in FY24E, respectively. Maintain BUY.