Buy Shriram City Union Finance; target of Rs 2800: Motilal Oswal

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26 Aug, 2025 12:21

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Motilal Oswal's research report on Shriram City Union Finance

SCUF reported PAT of INR470m for 4QFY18, much below our estimate. This was largely driven by higher provisioning expenses. PPoP grew 14% YoY (3% miss) to INR4.9b.  Disbursements grew 6% YoY to INR66b. MSME disbursements grew 30% YoY to INR31b, which reflects a breakout from the range-bound levels of INR23b-25b in the last 7-8 quarters. Likewise, disbursement growth of 40%+ YoY in the 2W segment was a key positive.  AUM grew 19% YoY to INR274b, though we note the repayment rate falling to 20% (-500bp YoY). We also note that the repayment rate in MSME financing has dropped from 73% to 60% over FY16-18. Yields compressed 100bp YoY to 18.7%. Given intensifying competition, the management has guided to yield compression of ~50bp going forward. Opex grew 16% YoY, manifesting 13% growth in PPoP to INR4.9b. SCUF has 1,500-2,000 people “on the bench” currently – higher staff utilization would result in improvement of 20-30bp in the expense ratio in FY19. GNPL ratio increased ~220bp QoQ to 9% on transition to 90dpd. Write-offs were largely in line with the prior two quarters at INR1.7b. Management targets overall credit costs to decline to 3% in FY19. Given the overhaul in the MSME underwriting process, the MSME portfolio underwritten since April 1, 2017 has enjoyed superior asset quality compared to the past.

Outlook

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. With incremental competitive intensity, yields are likely to be under pressure. A steady decline in opex due to technology intervention and manpower rationalization should largely offset yield compression. Given SCUF has already transitioned to 90dpd NPL recognition, we expect credit cost to decline in the near term, thus improving return ratios. We increase our FY19/FY20 estimates by 5%. Maintain Buy with a TP of INR2,800 (implied 2.5x FY20E BV).

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