MOSL: SHRIRAM CITY UNION FINANCE (Ground Reality)-Mixed bag-Yields under pressure-initial results of new MSME sourcing model positive

SHRIRAM CITY UNION FINANCE (Ground Reality): Mixed bag; Yields under pressure; initial results of new MSME sourcing model positive

• We met the management of Shriram City Union Finance (SCUF), its branch heads, 2W dealerships where it conducts business, and also a few of its MSME customers.
• Demand in the MSME and 2W segments has been picking up. In addition, SCUF is trying to prevent customer migration to banks after a loan cycle is complete by offering 200bp lower interest rates in the second cycle. While this would have an impact on margins, the repeat business comes at almost zero incremental cost and much lower credit risk. Also, most customers fall under the GST composition scheme, due to which the impact of GST is minimal.
• Gold finance remains subdued for SCUF on account of regulatory issues (such as cash limit on disbursement) as well as demand migration to pawn brokers.
• While we are bullish on SCUF’s long-term prospects, we acknowledge there are near-term issues such as yield pressure and rising cost of funds. However, this would be partially offset by lower write-offs on account of the new MSME model, in our view. Overall, our FY19/20E EPS estimates have been cut by 5-7%. Maintain BUY with a reduced TP of INR2,700.