MOSL: SHRIRAM CITY UNION FINANCE (Buy)-Visible pickup in disbursements; ECL is 7.3% of AUM

Shriram City Union Finance: Visible pickup in disbursements; ECL is 7.3% of AUM

(SCUF IN, Mkt Cap USD1.8b, CMP INR1911, TP INR2500, 31% Upside, Buy)

• SCUF reported PAT of INR2.3b under Ind-AS (+15% YoY). Under IGAAP, PAT grew 10% YoY to INR2.13b (7% above estimate). The beat was largely led by less-than-expected yield compression.
• Disbursements grew 11% YoY to INR64b. However, excluding gold finance, disbursements were up 23% YoY. MSME finance has picked up – from an average quarterly level of INR23b-25b, it improved to INR28b-30b in the last two quarters. Total AUM grew 21% YoY to INR292b. We, however, note that the repayment rate has been declining. Repayment rate (annualized) declined by more than 1,300bp YoY to 68%.
• Yield compression of 90bp YoY was offset by a 60bp YoY reduction in cost of funds. The management has guided 50-60bp yield compression for FY19 due to competitive pressures as well as refinancing for existing MSME customers at lower rates.
• While the magnitude of write-offs grew 24% YoY to INR1.7b, it has been largely stable in the past few quarters. We’ll closely monitor this number.
• Ind-AS impact: (a) SCUF took ~2% hit on net worth in FY17 and FY18 largely due to a shortfall of provisions under the ECL method, offset by recognition of interest income on NPLs. As of 1QFY19, ECL was 7.3% of AUM. (b) Impact on PAT for 1QFY18/19 was 3-8% (higher under Ind-AS).