CRISIL assigns valuation grade of 5/5 to Shriram City

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CRISIL assigns valuation grade of 5/5 to Shriram City

CRISIL Research has come out with its report on Shriram City Union Finance. The research firm has maintained the fundamental grade of 3/5 to the company in its November 15, 2011 report.

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Shriram City BSE | NSE 31/05/12 Are Mutual Funds betting on Shriram City?

CRISIL Research has come out with its report on Shriram City Union Finance . The research firm has maintained the fundamental grade of 3/5 to the company in its November 15, 2011 report.

Shriram City Union Finance Ltd's (Shriram City's) Q2FY12 earnings were broadly in line with CRISIL Research's expectations due to the growth in total operating income and lower provisions despite an increase in cost to income ratio. We broadly maintain our estimates and our cautious stance on the asset quality for H2FY12 given the challenging environment. We maintain the fundamental grade of 3/5.

Q2FY12 result analysis
• Q2FY12 total operating income grew 11.4% q-o-q to Rs 2,424 mn as net interest income (constituting 99% of total income) grew 17% q-o-q to Rs 2,399 mn. Non-interest income was subdued at Rs 25 mn in Q2FY12.

• Net interest income grew 17% q-o-q led by 13.5% growth in AUM to Rs 100 bn and with gross spreads increasing 42 bps to 12.1%. Gold loans, small business loans and auto loans - which drove AUM growth - together constituted 82% of AUMs in Q2FY12 as against 69% in Q1FY12. Gross spreads increased as yields were repriced by 53 bps to 20.3% despite cost of funds increasing by 11 bps to 8.2%.

• Operational costs grew 35.4% q-o-q to Rs 826 mn due to rise in operating expenses which rose 42.3% q-o-q to Rs 636 mn due to non-convertible debenture (NCD) issue expenses of Rs 80 mn booked in Q2FY12 (excludes pre-allotment interest expense) and technology spends. Staff cost grew 16% q-o-q due to salary revisions. So, cost to income ratio rose to 35.2%.

• Provisions fell 4.4% q-o-q to Rs 346 mn. Despite a challenging environment, asset quality was healthy with gross NPAs and net NPAs at 1.8% and 0.4%, respectively, helped by rising contribution of low-risk gold loans to AUMs (gold loan contribution grew 200 bps q-o-q to 28% of AUM).

• PAT was flat q-o-q (up 45.8% y-o-y) due to higher cost to income ratio despite growth in operating income and lower provisions. Excluding NCD issue expense of Rs 100 mn in Q2FY12, PAT up 13% q-o-q to Rs 911 mn.

Earnings estimates - largely maintained
We increase our FY12 and FY13 total operating income estimates by 8% and 9%, respectively, as we have increased the total AUM to Rs 112 bn and Rs 134 bn, respectively. We have increased the operating costs in FY12 due to the NCD issue expenses and because the company is investing in technology infrastructure; hence the pre-provision profit remains largely unchanged. Overall, our PAT estimates are largely maintained.

Valuations: Current market price has strong upside
We maintain our fair value of Rs 673 per share based on the price-to-book multiple method. We had assigned a price to book (P/B) multiple of 1.9x on FY13 adjusted book value. Accordingly, the valuation grade is 5/5.

Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose.

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