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

Motilal Oswal's research report on Shriram City Union Finance

Shriram City Union Finance's (SCUF) 1QFY18 PAT increased 7% YoY to INR1.9b. Operating profit was up 20% YoY (in line), driven by strong loan growth and controlled opex. However, sharp increase in provisions (higher write-offs) drove moderate profit growth. After strong performance in 1QFY17, disbursement growth in 1QFY18 moderated to 7% YoY. Disbursements were driven by gold loans only. Non-gold loan disbursements were flat YoY.  2W disbursement growth of 2.2% YoY was below our expectation. Even considering the impact of pre-buying in 4Q, disbursements for 1HCY17 v/s 1HCY16 were down 2% YoY. SCUF has been losing market share to some captive financiers. However, management expects growth to return to the mid-to-high teens by the end of the year. AUM grew 18% YoY (+4% QoQ) to INR241b, driven by 17% YoY growth MSME loans. Growth in the 2W and gold loan segments was 12% YoY. Asset quality remained stable, with the GNPL ratio increasing only 3bp sequentially to 6.76% (v/s 5.11% in 1QFY17 at 150dpd). PCR of 74% was a key positive in the quarter. Write-offs of INR1.4b were in line with 4QFY17, but much higher than the quarterly average in FY16/17. Shriram Housing Finance had a subdued quarter with 58% YoY decline in disbursements due to a difficult environment.

Outlook

SCUF is a niche play in the retail NBFC space with 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 strong PCR of 73%. However, there are still lingering effects of demonetization. Plus, the impact of GST on both growth and asset quality is uncertain. We cut our FY18/19 estimates by 8%/4%. Maintain BUY with a TP of INR2,800 (2.8x FY19E BV).