Company Update -IIFL
Shriram City Union Finance: Risk-reward favourable - BUY
CMP: Rs1,658, 12-mts Target Rs1,996, Upside 20.4%
Strong market position to underpin a prominent growth recovery
Shriram City Union Finance (SCUF) enjoys a leading market position in small enterprise loans (SEL) and 2W financing in its key markets of presence. The resultant pricing power is reflected in company's higher yields and margins. After significantly moderating during FY13-15, AUM growth has started to pick-up from FY16; largely led by SEL and 2W financing segments, which combined contribute ~72%. With the external environment likely to turn supportive for these products, overall asset growth should accelerate over the longer term. SCUF is well-equipped to drive and manage higher growth levels, and thus we expect a strong AUM CAGR of 22-24% over FY16-19. Share of SEL portfolio is estimated to increase in ensuing years.
RoA could move towards 3% post FY18
SCUF's RoA will remain under pressure over the next couple of years on account of ongoing transition towards 90 dpd NPL recognition. Its impact on credit cost and NIM would be significant as noticed when the company moved from 180 dpd to 150 dpd in Q4 FY16. A large portion of the impact was felt in the SEL portfolio where gross NPLs increased by more than 70%. The subsequent migration to 120 dpd in FY17 and 90 dpd in FY18 could also have a material impact on the segmental NPLs, as neither SCUF nor the customers may effectively adjust to the new norms. However, RoA could likely improve in FY19 aided by operating leverage and some moderation in credit cost assuming a decline in NPL accruals driven by a much improved operating environment.
Niche franchise, reasonable valuation
Our positive stance on SCUF is underpinned by a) high likelihood of significant asset and earnings growth recovery over the next three years and b) benign street expectations around it which is reflected in reasonable valuation of 2x FY19 P/ABV. Post migrating to the stringent NPL norms, SCUF's profitability would remain sturdy in our view. Retain BUY recommendation with a 12-month target price of Rs.1,996.
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