Buy Shriram City Union Finance; target of Rs 800: IIFL

“Shriram City Union Finance (SCUF) suggest improving underlying growth momentum. SCUF is making significant efforts in rolling out its gold loan offerings through the large Shriram Transport Finance (SHTF) network into the northern and western markets. Management expects this business to ramp up and start contributing to loan growth over the next 3-4 quarters. We raise loan growth estimates, even as we expect credit costs to remain subdued, resulting in robust 29% EPS CAGR for SCUF over FY10-13ii. Earnings upgrades and reducing growth gap vis-a-vis peers should drive stock performance. Current valuations, at 2.2x FY12ii BV, provide an attractive entry point into a strong franchise having robust earnings and return outlook.”

“SCUF’s strong positioning in southern Indian markets has been driven by access to the Shriram group’s large chit-fund infrastructure of over 450 branches. This arrangement has worked well, and SCUF plans to extend the success to other markets through the proposed gold loan tie-up with SHTF (160 branches in north and west), the group’s truck financing arm. Management expects the new markets to ramp up and contribute almost a third of its gold loan disbursements in 3-4 quarters.”

“We raise loan growth estimate for SCUF and now forecast a 35% CAGR (vs 30% earlier) over FY10-13ii, on the back of improving underlying demand in existing markets and some upside from the tie-up with SHTF. We expect NIMs to decline on increasing proportion of lower-yielding secured loans and higher funding costs. Correspondingly, we also cut credit cost estimates to factor in the changing loan mix. Overall, we raise our earnings estimates by 7 - 15% over FY11-13ii and forecast a 29% EPS CAGR over this period.”

“We expect strong momentum driven by gold and small business loans to reduce growth differential vis-a-vis peers. This, along with an improving risk profile, should drive stock performance. SCUF remains an attractive play on the deepening penetration of financial services into niche markets. We raise target price marginally, from Rs 790 to Rs 800, and retain BUY,” says IIFL research report.

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