Motilal Oswal initiates coverage on Shriram City with buy

Citing sustainable model, strength in its MSME business, leadership in two-wheeler financing and improving return ratios, among others, Motilal Oswal has initiated coverage on Shriram City Union Finance. The brokerage has given the stock a buy rating with target price of Rs 2500 per share.While demonetisation has hit growth at the company, Motilal Oswal sees it as a temporary blip as the cash flow situation is improving rapidly. “Demand for credit in the target customer base remains high, and most of the loans are for income generation,” the brokerage said in its report. It has outlined a few reasons for initiating coverage on the stock. Business modelThe brokerage feels Shriram City Union Finance is well placed to run a business of loan appraisals/collections, which also require a strong on the ground knowledge. “NBFCs like SUCF are well placed to capture this segment with their local knowledge, cost-efficient business model and robust recovery mechanism. SCUF also relies on the large pool of Shriram Chits’ customers to grow its business and gain information on customer credit/repayment history,” its report stated. MSME focusMSME financing makes up a huge chunk of the company's loan book. It targets customers with a credit requirement below Rs 2.5 million. “At Rs 0.5 million, the average loan ticket size of the company is significantly lower than the ticket size of business loans (LAP) of other NBFCs,” the brokerage stated in its report. "Apart from robust growth opportunities in this segment, strong collateral also ensures healthy asset quality and lower loss given default," the report added. Leadership in 2-wheeler financingWith a large network of 6,000 dealers, the company disburses nearly 75,000 loans in a month. It is said to target mostly self-employed customers who face difficulties to get credit from banks. This, the brokerage feels, helps the firm gaining foothold in new territory as well as understand the credit behavior of this segment in a particular region.Strong earnings CAGRMotilal Oswal expects falling interest rates and strong pricing power in the targeted consumer segment to benefit the margins. This improvement along with better operating leverage (due to robust growth) and higher leverage on equity, the return on equity should approach 17 percent by FY19. Furthermore, the earnings CAGR will tough 25 percent over FY16-19.