Shriram City Union Finance (SCUF) reported 1Q17 earnings at Rs1.8bn, up 23% YoY and 11% above JMFe due to expansion in margins and improvement in cost ratios. Disbursements growth picked up (28% YoY) while AUM growth remained healthy (17% YoY/5% QoQ); proportion of small business loans increased further to 54.7% in 1Q17 (vs. 53.5% in 4Q16). Cost to AUM declined to 5.47% (vs. 5.52% in 1Q16). Asset quality trends were stable with gross NPLs (on AUM basis, at 150DPD) remaining stable at 5% while coverage ratio improved to 71.4% (vs. 69.7% in 4Q16). While we continue to like SCUF's niche business model (SME financing and access to chit fund customers), return ratios over the next two years would be impacted due to transition to 90 DPD. We value SCUF at 2.5x Jun'18 BV, implying Jun'17 TP of Rs2,200.
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