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Nov 14, 2017 04:02 PM IST | Source:

Buy Shriram City Union Finance; target of Rs 2650: Motilal Oswal

Motilal Oswal is bullish on Shriram City Union Finance has recommended buy rating on the stock with a target price of Rs 2650 in its research report dated November 03, 2017.

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Motilal Oswal's research report on Shriram City Union Finance

2QFY18 PAT declined 3% YoY to INR2.0b. Operating profit rose 20% YoY (3% beat), driven by strong loan growth and controlled opex. However, a sharp increase in credit costs (+71% YoY) weighed on the bottom line. Recovery has been slow post demonetization and rollout of GST. In the last four quarters since demonetization, non-gold disbursements grew at an average of only 4% YoY. Total disbursements were largely driven by MSME (+8% QoQ) and gold (4% QoQ). Disbursement growth in 2Ws was 3% QoQ. We forecast 12%/18% disbursements growth in FY18/19. AUM of INR249b (+16% YoY) was led by 15% YoY growth in MSME loans. 2W and gold loan segments grew at 9% and 22%, respectively. We model 14%/15% AUM growth for FY18/19 as we expect moderate loan growth. With 40bp sequential expansion in the NIM (on AUM), NII grew 19% YoY. With opex growing (+17% YoY) slower than income growth (+19% YoY), CIR reduced by 100bp sequentially to 38%. An increase of 50bp/125bp QoQ/YoY in credit cost (400bp) largely tapered off growth in PPoP (+19% YoY). This manifested in a 3% YoY decline in PAT to INR2b. While the GNPL ratio increased only 15bp QoQ to 6.91%, write-offs remained elevated at INR1.6b. Average quarterly write-offs have almost doubled in the past two years. PCR of 74% was a key positive, though.


SCUF is a niche play in the retail NBFC space with a focus on MSME lending. Its business model offers high growth potential with strong profitability. While we expect GNPL (%) to rise due to NPA migration by FY18, we believe loan loss provisioning will decline as SCUF has a strong PCR of 73%. However, there are still lingering effects of demonetization. Besides, the impact of GST on both growth and asset quality is uncertain. We cut our FY18/19 estimates by 2%/7%. Maintain Buy with a TP of INR2,650 (2.5x Sep 2019E BV).

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