Shriram City: AUM growth led by small business loans

CRISIL Research has come out with its report on Shriram City Union Finance (Shriram City). According to the research firm, the company is expected to raise Rs 3.4 bn from warrant conversion which will further shore up capital. Recently, the board approved the plan to raise Rs 10 bn to capitalise the company.

Shriram City's Q3FY13 results were in line with CRISIL Research's expectations. Assets under management (AUM) grew 3% q-o-q (up 42% y-o-y) to Rs 164 bn led by 13% q-o-q growth in small business loans (36% of AUM) despite gold loans (37% of AUM) declining 5% q-o-q. PAT grew by 4.3% q-o-q (up 34.9% y-o-y) to Rs 1,126 mn following growth in operating income despite a 10.7% sequential rise in operational costs. We maintain our earnings estimates and the fundamental grade of 3/5.

Small business loans drove AUM growth and resulted in higher yields
Net interest income grew 5% q-o-q to Rs 4.2 bn largely driven by 3% AUM growth led by small business loans (36% of AUM compared to 33% in Q2FY13). Yields grew by 43 bps q-o-q to 20.1% following a rise in small business loans (these loans fetch higher yields). Gross spreads were flat at 10.5% as rise in yields offset the high borrowing costs (high due to the rising portion of high-cost non-convertible debentures in the borrowing mix). Disbursements fell 3.7% q-o-q to Rs 43 bn as the company's focus shifted towards garnering higher volumes through lower ticket size business loans of Rs 0.1-Rs 0.15 mn from Rs 0.7-1 mn.

Cost to income ratio increased; capital adequacy rose to 16.2%

Operational costs grew 10.7% q-o-q to Rs 1,615 mn as staff costs rose by 52.1% q-o-q due to a) bonus / incentives and b) provision for provident fund and gratuity for employees who had migrated from Shriram Chits to Shriram City. Hence, cost to income ratio grew by 197 bps q-o-q to 39.6%. Salaries of migrated employees are a re-alignment of costs from operating expenses to staff costs. Hence, other operating expenses fell 9.3% q-o-q to Rs 891 mn. The management expects this migration to complete by FY13-end.

The capital adequacy ratio increased to 16.2% due to tier II capital infusion. Shriram City is expected to raise Rs 3.4 bn from warrant conversion which will further shore up capital. Recently, the board approved the plan to raise Rs 10 bn to capitalise the company.

Evolving with new regulatory norms for NPA recognition and securitisation

As a buffer against the Reserve Bank of India's (RBI's) draft NBFC guidelines, Shriram City has moved to 150-day non-performing asset (NPA) recognition for all segments. Gross NPAs grew 16% q-o-q to Rs 2,260 mn. As a percentage of loan book, gross NPAs rose to 1.57% from 1.37% and net NPAs rose to 0.47% from 0.32% q-o-q as it provided for gold loans. Net NPAs would be 0.37% ex-gold loan provision. Coverage ratio is 78%. Credit costs (provisions and write-offs) as percentage of AUM fell by 28 bps to 2.6%.

It has resumed securitisation under new RBI guidelines. It securitised Rs 6 bn loans through the pass through certificate (PTC) route. Off-book constituted 12% of total AUM.

Fair value revised to Rs 1,116 from Rs 803
We roll forward our base year to FY15. We revise the P/B multiple once again to 1.9x from 1.7x as we do not see any major compression in Shriram City's return ratios if the RBI's draft guidelines for NBFCs are implemented. Hence, our fair value is raised to Rs 1,116 from Rs 803 per share. At the current market price of Rs 1,079, our valuation grade is 3/5.

To read the full report click on the attachment

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.

© CRISIL Limited. All Rights Reserved. Published under permission from CRISIL"

Read More