Shriram City Union Finance - Caution rules the roost; fresh borrowings still a tad difficult - ICICI Securities

We appreciate that Shriram City (SCUF) erred on the side of caution in Q1FY21. SCUF, in our view, is cognizant that its loan book is vulnerable given its presence in higher risk segments like MSME and personal loans. With insignificant disbursements in MSME and personal loans, disbursements in Q1FY21 declined 79% YoY and AUM was down 6% YoY. Collection efficiency at ~71% in June (and improving) is encouraging despite ~26% AUM under moratorium (where customers have not repaid anything since April). Covid-19 provisions of Rs1.8bn in Q1FY21 took total Covid-19 provisions to Rs6.1bn (~210bps of AUM) which we think are reasonable given its asset profile. It invested in digitisation, rationalised its manpower and is looking to deliver cost efficiencies. Despite near-term difficulty in securing newer borrowings, its collection/fixed deposit franchise has enabled it to discharge liabilities and maintain a comfortable liquidity position. This is not without the post-moratorium risk of sharp asset quality deterioration and consequent high credit costs. We maintain HOLD.

- ECLGS scheme for individual MSME and RBI restructuring scheme for MSME: Just because loans under ECLGS have a sovereign guarantee, SCUF does not want to go overboard and disburse to everyone who is eligible. Interest rates under the scheme are capped at 14% and the company will give sanctions only to its MSME customers with a good track record. Likewise, it has not restructured MSME accounts in the past and even now would want to give its customers the time to repay rather than restructure loan accounts (and delay the stress recognition).

- Improvement in collections efficiencies (also helped by bullet gold loan repayments) is encouraging: Collection efficiency improving to ~80% in July (~52% in May) is positive. Especially for 2-wheelers (2W), where improving collection efficiencies mean SCUF can engage in securitisation of 2-W loans. SME loans could follow in Q3FY21. GS3 improved 60bps QoQ and stood at 7.3% (including write-offs of Rs2.25bn). In particular, 2W and MSME exhibited QoQ improvement of 53bps and 135bps, respectively. PCR on GS3 improved to 50.4%.  Fresh borrowings still a tad difficult even as it only wants to raise long term: SCUF mobilised Rs10.6bn (vs Rs36.4bn in Q4FY20) through SIDBI special loans, banks and retail fixed deposits. Commercial paper in the borrowing mix has completely run off. Because of moratoriums, there were no new securitisations in Q1FY21 and any new securitisation (except under PCG scheme) will be difficult in Q2 as well. Even though its incremental borrowing costs have declined marginally, combined with yield compression, the NIM could compress by ~70bps in FY21E.

- Outlook, valuations and risks: We model an AUM CAGR of ~5% over FY20-FY22E and build-in credit cost of ~4.3% for FY21E with the economic dislocation leading to deterioration in asset quality. We value standalone business at 0.5x FY22E P/BV (unchanged). Our SoTP-based (table-3) valuation leads to a target price of Rs685 (earlier: Rs695). Maintain HOLD. Potential exit of a large investor and the proposed mergers within the group would remain an overhang.

Shares of SHRIRAM CITY UNION FINANCE LTD. was last trading in BSE at Rs.782 as compared to the previous close of Rs. 716.5. The total number of shares traded during the day was 39433 in over 3845 trades.

The stock hit an intraday high of Rs. 845 and intraday low of 719. The net turnover during the day was Rs. 31534925.

Source : Equity Bulls

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