EUR 120.00 For Business Accounts Only

MOSL: SHRIRAM CITY UNION FINANCE (Buy)-Operating performance in line-scaling back in MSME finance

SHRIRAM CITY UNION FINANCE: Operating performance in line; scaling back in MSME finance

(SCUF IN, Mkt Cap USD1.3b, CMP INR1403, TP INR1900, 35% Upside, Buy)

 

• PAT grew 10% YoY to INR2.5b (3% miss) in 1QFY20. The quarter was characterized by a slowdown in MSME disbursements, leading to sluggish overall growth, contraction in margins and stable asset quality.
• MSME finance disbursements were down 20-25% QoQ/YoY to INR22.8b on account of (a) tight liquidity, and (b) scaling back in large-ticket (INR10m+) loans. Disbursements in other segments were largely in line with the trend, while it picked up 20% YoY in gold finance.
• Thus, AUM grew 3% QoQ/5% YoY to INR304b. While management expects 15% YoY AUM growth in FY20, our estimate is lower at 11%.
• Yield on AUM was largely stable YoY at 19.5%, while cost of funds increased 90bp YoY to 9.5%. SCUF cut down its CP exposure (down QoQ from INR18b to INR12b) and increased its borrowings from retail NCDs (up from INR38b to INR45b).
• Asset quality was stable, with the GS 3 ratio at 8.9%. PCR (on stage 3 loans) was stable QoQ at 43% (down from 53% in 1QFY19). Quarterly write-offs have been stable at INR1.6-1.7b for the past eight quarters.
• Valuation and view: SCUF's business model in MSME and 2W finance has immense scalability, however, the near-term outlook remains challenging due to liquidity constraints. While the company is trying to address these issues by diversifying liability mix (plans to raise ECBs in 3QFY20; retail NCDs), we believe growth will be subdued over the next few quarters. Thus, we cut our FY20/FY21 EPS estimates by 2-5%. Maintain Buy with a TP of INR1,900 (1.5x FY21 BVPS).