Shriram City Union:Steady performance: JM Financial

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Steady performance


􀂄 2Q11 net profit up 11% YoY: Shriram City Union Finance (SCUF) reported
2Q11 net profit at `556mn, up 11% YoY (13% QoQ) and c.5% above JMFe.
Earnings growth was driven by 7% YoY growth in NII and lower than expected
credit costs due to lower delinquencies. Loan growth remained strong at 37%
while reported margins declined 40bps YoY and 49bps QoQ due to change in
AUM mix.


􀂄 Loan book up 37% YoY on robust disbursements in small business and
secured loans: Loan book grew 37% YoY (13% QoQ) to `58.3bn driven by
strong disbursements of `18bn (up 80% YoY, 18% QoQ). Growth in
disbursements was led by small business loans (up 85% YoY, 21% QoQ) and
secured loans (consists of auto and gold loans, up 28% YoY). Loan and AUM
growth remained strong at 37% and 33% YoY respectively. We expect
continued momentum in auto, gold and business loans which should lead to
30% CAGR in AUM over FY10-13E.
􀂄 Subdued NII growth due to margin pressure: NII growth was subdued at 7%
YoY (7.2% QoQ) to `1.6bn as margins took a hit due to decline in loan yields.
This was due to change in mix towards lower yielding gold loans which now
account for c.22% of AUM vs c.10% last year. Consequently, 2Q11 reported
NIM declined 40bps YoY and 49bps QoQ to 11.2% due to 220bps YoY (84bps
QoQ) fall in yield coupled with pressure on cost of borrowings, which inched
up marginally (10bps) on a sequential basis. We factor in 100bps decline in
NII/AUM over FY10-13E and 24%CAGR in NII over FY10-13E.
􀂄 Lower delinquency leads to 23% YoY decline in credit costs Provisions
declined 23% YoY (12% QoQ) to `235mn as asset quality displayed stable
trends. Delinquency during 2Q11 declined significantly to 2.03% (annualised)
compared with 4.49% in 2Q10 and 2.76% in 1Q11. Asset quality ratios
improved with gross NPLs of 2.1% (2Q10: 2.42%), net NPLs of 0.63% (2Q10:
0.99%) and coverage ratio of 70% (2Q10: 60%). We factor in stable credit costs
of c.250bps over FY10-13E.
􀂄 Maintain BUY, raise TP to `850: We expect earnings CAGR of 24% over FY10-
13E driven by strong loan growth, improving cost ratios and stable credit
costs. We expect SCUF to report healthy return ratios with ROA of 3.2% and
ROE of 23% over FY10-13E. We roll-forward to Dec’11 and value SCUF at 12x
Dec’12 EPS, implying Dec’11 target price of `850, upside of c.24%. 1