Shriram City Union Finance - Path to normalisation earlier than envisaged - ICICI Securities

Shriram City Union Finance's (SCUF) Q3FY21 earnings reflect earlier-than-envisaged path to normalisation. Disbursements more than doubled QoQ (up 6% YoY) driving 4% sequential rise in AUM. Asset quality exhibited few promising trends: 1) Stage-3 down 20bps QoQ to 6.46%, 2) stage-2 assets managed at 7% (10-13% historical average), 3) restructuring to settle at 0.5% of AUM, 4) collection efficiency of 98% (better than pre-covid level), and 5) credit cost contained lower at 2.5%. Stress testing outcomes suggest 53% coverage on stage-3 and 4.2% coverage on stage-1/2 is more than sufficient. It will be constructive on scaling up its mainstay SME, 2-wheeler and gold lending businesses driving AUM growth of >15% FY23 onwards. Resilience through pandemic was evident in superior NIM, contained stress pool, adequate liquidity and healthy capitalisation (tier-1 30%). Enhanced visibility on uptick in AUM growth, contained credit cost and superior RoA/RoE profile with >20% upward earnings revision suggest favorable risk reward at 0.6x FY23 book. Upgrade to BUY with a revised TP of Rs1,443 (earlier Rs920). Potential exit of a large investor and the proposed mergers within the group can remain an overhang.

- Collection trends surprised positively; restructuring within guided range: Collection efficiency (including overdues) has consistently improved MoM - 80%/82%/95%/98% over July/Aug/Sep/Dec, respectively. Given the granular lending profile, focus was more on collection. Collection against monthly billing demand is also back to pre-covid levels of 77-78%. As was indicated by the management, restructuring was invoked for ~50bps of AUM (only 12% approved yet, balance in next quarter).

- Decline in stage-3 and stable stage-2 assets instills confidence: In contrast to the sequential rise in pro forma stage-3 assets for other financier, SCUF managed it better than anticipated (6.46%, down from 6.67% QoQ). It has provided adequately on pro forma slippages, which are now carrying coverage of 53%. Stage-2 assets were also steady at ~7% (past few years' average of 10-13%). With covid-related provisioning of Rs5.9bn, it carries 4.2% coverage on stage-1/2 assets. Consequently, credit cost settled at 250bps. Factoring in 9MFY21 credit cost trends and expecting stage-3 assets to peak at 9.8% in FY22E, we reduce our credit cost estimate to 3.4% / 3.3% / 3.0% respectively for FY21E/FY22E / FY23E.

- Disbursements double QoQ improving AUM growth visibility: Q3FY21 reflected the path to normalisation on disbursement front. Disbursements doubled QoQ and even on YoY basis, it grew 6% to Rs62bn. It was led by mainstay products - MSME (grew 186% QoQ), 2-wheeler (grew 133% QoQ, highest ever disbursements) and gold too grew well (24% YoY). Consequently, AUM grew QoQ by 3.7% (down 3% YoY compared to 6% in Q2FY21) Follows cautious approach towards unsecured personal loans book; nonetheless with no undue stress visible (beyond existing 10% plus stage-3), it plans to increase presence in this segment. It sounds constructive on scaling up its mainstay SME, 2-wheeler and gold lending businesses driving AUM growth upwards of 15% FY23 onwards.

- Adequate liquidity, healthy capitalisation lends comfort: It mobilised incremental borrowings of Rs46bn with weighted average tenor of three years at 8.24%. Cost of borrowings improved >30bps to 9.24% with likelihood of further downward repricing in the coming quarter. At the same time, yields crossed 20% benchmark (benefitting from mix change) and NIMs breached 13% mark. This, coupled with contained credit cost, improved operating profile to absorb any unanticipated shock. Also, successfully floated market-linked debentures for the first time. Liquidity backup comprising unencumbered assets of Rs26.7bn, SLR of Rs8.8bn and undrawn bank lines of Rs3.7bn is sufficient to manage interim growth.

Shares of SHRIRAM CITY UNION FINANCE LTD. was last trading in BSE at Rs.1008.1 as compared to the previous close of Rs. 983.8. The total number of shares traded during the day was 3352 in over 440 trades.

The stock hit an intraday high of Rs. 1040 and intraday low of 992.5. The net turnover during the day was Rs. 3381679.

Source : Equity Bulls

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