Accumulate Shriram City Union Finance, target Rs 2,448: Emkay Global Financial Services

Emkay Global Financial Services has an accumulate call on Shriram City Union Finance with a target price of Rs 2,448.

The current market price of Shriram City Union Finance is Rs 1,932.75.

Time period given by the brokerage is one year when Shriram City Union Finance price can reach the defined target.


Investment rationale by Emkay Global:
AUM growth continues to outpace disbursements growth as SME loan tenures rise: AUMs for Q1FY19 grew by 20.5 per cent yoy (5.3 per cent qoq) to Rs 292bn despite of slower disbursement growth of 10.5 per cent yoy mainly due to increasing tenure of existing loans especially in SME segment. However, disbursements excluding gold finance segment grew by a healthy 23 per cent yoy. MSME and 2 Wheeler continued to support growth whereas gold finance book decline. We are factoring in 18 per cent CAGR growth in AUM from FY18-20E.

Margins to remain under pressure - SCUF contemplating selective hike in yields: SCUF’s calculated Net Interest Margin (NIM) dipped by 73bps yoy to 13.2 per cent as yields remain pressurized due to lack of customer retention, cross-sell opportunities and writing of a better quality portfolio. However, NIMs improved 111bps sequentially as there were higher interest reversals in the previous quarter. We believe, going forward, margin pressures are inevitable considering rising costs and falling yields. We are factoring in NIMs to decline to ~12.7 per cent by FY20E against ~13.3 per cent in FY18.

GNPAs stable as SCUF switches to IND AS reporting – credit costs witnesses an improvement: Gross NPAs remained relatively steady at 8.9 per cent of AUM as company moved to IND AS reporting – NNPA at 3.4 per cent (1.8 per cent in Q1FY18) with PCR of 61.8 per cent. The management is comfortable with PCR at current levels, however, has guided for credit costs is expected to remain elevated at 2.75 - 3 per cent. On switch to IND AS, standard asset provisioning rate rose to 2.3 per cent against 0.4 per cent as per earlier norms. Hence, though we expect overall credit cost to decline since the company has already moved to 90 days NPA recognition and IND AS reporting, ease in provisioning will be slow paced. The exposure to group company SVL (Rs4bn) continues to remain standard and SCUF has provided for it accordingly and in line with standard asset provisioning under IND AS.

Shriram Housing Finance (SHF) ROA dips on lower yields: SHF AUM grew by 12 per cent yoy (+3 per cent qoq) to Rs18.4bn. Reported Yields fell by 210bps yoy as per IND AS and 82bps as per IND GAAP reporting. Reported GNPLs rose to 6.4 per cent versus 5.1 per cent in Q1FY18. Subsequently ROAs fell to 1.1 per cent against 1.3 per cent in Q1FY18.