MOSL: SHRIRAM CITY UNION FINANCE (Buy)-Margins surprise positively-Growth to be calibrated going forward

SHRIRAM CITY UNION FINANCE: Margins surprise positively; Growth to be calibrated going forward

(SCUF IN, Mkt Cap USD1.4b, CMP INR1580, TP INR2000, 27% Upside, Buy)

• Shriram City Union Finance (SCUF) reported 2QFY19 PAT at INR2.5b under Ind-AS (+6% YoY). Under IGAAP, PAT grew 10% YoY to INR2.4b (11% above estimate). The beat was largely led by better-than-expected spreads.
• Disbursements grew 5% YoY to INR65b. However, excluding gold finance, disbursements were up 16% YoY. SCUF funded ~300,000 two-wheelers (2Ws) in 2Q. However, the past few weeks have been weak for the two-wheeler industry on account of change in the insurance norms. Management expects 20-25% decline in two-wheeler sales for the industry in 3QFY19.
• The company managed to keep its spread largely stable on a sequential basis at 11%. Cost of funds has remained largely stable on a sequential basis - largely due to refinancing of high cost liabilities. SCUF has hiked its lending rates to large MSME customers (ticket size > INR2.5m) which should help maintain yields. Hence, compared to the earlier guidance of 40bp yield decline, it is now revised to stable yields, going forward.
• The company is able to draw down on existing bank lines but new lines are taking time. It raised INR3b CP at 8.3% earlier this month. Note that CRISIL upgraded SCUF to AA earlier this fiscal.