SHRIRAM CITY: Disbursements strong; provisioning lower:: Edelweiss

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SHRIRAM CITY UNION FINANCE
Disbursements strong; provisioning lower



􀂄 Earnings buoyed by strong disbursements and lower LLP
Shriram City Union Finance (SCUF) reported PAT of INR 556 mn (up 11% Y-o-Y
and 13% Q-o-Q) in Q2FY11. Good traction was witnessed in disbursements led
by business and gold loans (up 80% Y-o-Y, 18% Q-o-Q). Loan book grew 37%
Y-o-Y (13% Q-o-Q) to INR 58.3 bn; however, NII growth was pegged at 3% Y-o-
Y as margins came off 50bps Q-o-Q (to 11.2%). Gross NPLs came off to 2.12%
(from 2.26% in Q1FY11) and LLP declined 23% Y-o-Y to INR 235 mn.
􀂄 Disbursements gained traction led by business loans
As was guided by the management, focus continued on business loans
(disbursements in this segment were up 45% Q-o-Q) and gold loans (now
constituting ~15-16% of outstanding AUMs of INR 63.5 bn). Strong underlying
demand for automobiles led to more than 10% Q-o-Q growth in vehicle loan
disbursements. All these supported overall disbursement growth of 80% Y-o-Y
and 18% Q-o-Q to INR 18 bn. Management sounded confident of maintaining
the traction in disbursements. We have revised our disbursement growth
estimate to 33% CAGR and expect loan book CAGR of 32% over FY10-12E.
􀂄 Margins come off 50bps Q-o-Q; asset quality stable
Margins came off 50bps Q-o-Q to 11.2% as yield on advances compressed ~80bps
to 19.6%. We believe yields came off due to increased proportion of low duration
lending products. However stable cost of funds (at 9.5%) and higher securitisation
income supported margins. Cost of funds was maintained at the same level despite
rising interest rates as it resorted to lower duration wholesale borrowings and more
than 90% of liabilities were of fixed nature. Currently, average tenure of assets is
15-16 months and ~23 months for liabilities. Going forward, we believe change in
the portfolio mix and rising interest rates will continue to pressurise margins and we
are building in 40bps compression in spreads over FY10-12E.
SCUF’s gross NPLs came off to 2.12% in Q2FY11 (almost flat in absolute terms);
provisioning coverage was improved marginally to 70%, and net NPLs came off
to 0.6%. Loan loss provisioning declined 12% Q-o-Q (23% Y-o-Y) to INR 235
mn. We expect gross NPAs to remain under control at less than 2.5% by FY12E.
􀂄 Outlook and valuations: Positive; maintain ‘BUY’
We believe traction in disbursement was better than expected; NIMs, as anticipated,
came off during the quarter and asset quality was also stable. We broadly maintain
our EPS estimate for FY11 at INR 46.9 and for FY12 at INR 57.6. We like SCUF for its
presence in high-yielding, high-growth business and superior RoAs of ~3.5-4.0%
plus. The stock is trading at attractive valuations of 11.7x FY12E earnings for 20%
CAGR in EPS over FY10-12E and at 2.3x FY12E adjusted book for sustainable RoEs of
20% plus. We believe the stock should trade at 2.9-3.0x PB, implying an upside of
25-30%. We maintain ‘BUY/Sector Outperformer’.