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Disbursements remain buoyant; one-time provisioning dents PAT
Shriram City Union Finance (SCUF) reported PAT of INR 587 mn (up 45% Y-o-Y,
5.6% Q-o-Q) in Q3FY11. Maintaining the trend, good traction was witnessed in
disbursements (up 67% Y-o-Y, 16% Q-o-Q) led by gold and two-wheeler loans.
Margins also contributed to the upmove (up 130bps Q-o-Q to 12.5%) and NII
growth was pegged at 15% Q-o-Q. NPLs surprised on the positive; LLP increased
43% Q-o-Q due to one-time standard asset provisioning of INR 160 mn.
Gold loans add glitter to disbursements growth
Secured loans (majorly gold loans) and product finance (two-wheeler)
contributed to 67% Y-o-Y and 16% Q-o-Q growth in disbursements (to INR 21
bn) as these products grew 23% and 18%, Q-o-Q, respectively. Gold loans now
constitute ~25% of AUMs, up from ~22% in Q2FY11. Strong underlying demand
for automobiles kept product finance disbursements steady. We expect
disbursements and, thus, loan book, to register ~40% CAGR over FY10-12E.
Margins surprise positively; asset quality improving
Margins rose 130bps Q-o-Q, to 12.5%, as yield increased 100bps to 19.7%,
while cost of funds grew 20bps. Management indicated that while there was no
across-the-board rate hike, few branches raised rates as and when loans came
for re-pricing, mitigating the impact of lower yields on gold loans. Cost of funds
is maintained at 9.8%, despite rising interest rates. 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 bring margins under
pressure. Hence, we are building in 60bps margin compression over FY10-12E.
SCUF’s gross NPLs came off to 1.79% in Q3FY11 (down 5% in absolute terms).
Provisioning coverage stands at a comfortable 76%; hence, net NPLs came off to
0.4%. Loan loss provisioning increased 43% Q-o-Q (flat Y-o-Y), to INR 335 mn,
due to INR 160 mn on account of general provisioning on standard assets. We
are revising our provisioning estimate upwards to factor in standard asset
provisioning, but expect gross NPAs to remain at less than 2.5% by FY12E.
Outlook and valuations: Positive; maintain ‘BUY’
We believe traction in disbursements will continue, coupled with margin decline,
while asset quality will continue to provide comfort. We broadly maintain our EPS
estimate for FY11 at INR 47.1 and for FY12 at INR 60.8. 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 8.8x FY12E earnings for 24% CAGR in EPS over
FY10-12E and at 1.9x FY12E adjusted book for sustainable RoEs of 20% plus.
We maintain ‘BUY/Sector Outperformer’ recommendation on the stock.
Company Description
SCUF was incorporated in 1986 as a deposit accepting NBFC. Prior to 2002, it was
exclusively engaged in transport finance with special emphasis on financing pre-owned
commercial vehicles to small road transport operators. In 2002, it extended its product
lines to include small-ticket retail financing, viz., consumer durables, two wheelers,
personal, and enterprise loans. It deliberately went slow on disbursements in the CV
segment, which has become a key area of its group company Shriram Transport Finance.
The company’s operations are largely concentrated in the southern states of Andhra
Pradesh, Tamil Nadu, and Karnataka and the western region (particularly Maharashtra).
SCUF offers only small-ticket retail products (ranging from INR 25,000-250,000) with
shorter tenures (12-30 months), which generate yields in excess of 20%. It leverages
the large investor base (1.2 mn investors) of the Shriram Group’s chit fund entities to
continuously build its asset book and utilises 600 chit fund outlets for marketing its
products and collecting loans. The company has been successful in keeping its default
rates at lower levels by better assessment of its customers and effective collection of its
loans and has maintained best in class NIMs at 10-11%.
Investment Theme
SCUF follows a unique and sound business model with presence in the high-yielding,
high-growth, small-ticket retail finance segment (consumer durable finance, auto loans,
personal loans, business finance, and retail gold loans), and superior sustainable RoEs of
20% plus. The concept of chit fund-based lending is gradually losing its sheen and SCUF
aims to fill this space by lending to these customers, thereby retaining decades old
relationships.
Key Risks
SCUF operates in the small-ticket retail finance segment in semi-urban and rural areas
and may face stiff competition from banks, other financial institutions, and multinational
players, which have access to cheap funds. Our earnings estimates may not fructify if the
company is unable to maintain its spreads at expected levels of 10-12% due to inability
to maintain yields at 22-24%, amidst stiff competition. Risk of frauds and NPA accretion
is inherent to the retail lending business and NPA provisioning could be higher than our
estimates in case of any economic slowdown or dip in income levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Disbursements remain buoyant; one-time provisioning dents PAT
Shriram City Union Finance (SCUF) reported PAT of INR 587 mn (up 45% Y-o-Y,
5.6% Q-o-Q) in Q3FY11. Maintaining the trend, good traction was witnessed in
disbursements (up 67% Y-o-Y, 16% Q-o-Q) led by gold and two-wheeler loans.
Margins also contributed to the upmove (up 130bps Q-o-Q to 12.5%) and NII
growth was pegged at 15% Q-o-Q. NPLs surprised on the positive; LLP increased
43% Q-o-Q due to one-time standard asset provisioning of INR 160 mn.
Gold loans add glitter to disbursements growth
Secured loans (majorly gold loans) and product finance (two-wheeler)
contributed to 67% Y-o-Y and 16% Q-o-Q growth in disbursements (to INR 21
bn) as these products grew 23% and 18%, Q-o-Q, respectively. Gold loans now
constitute ~25% of AUMs, up from ~22% in Q2FY11. Strong underlying demand
for automobiles kept product finance disbursements steady. We expect
disbursements and, thus, loan book, to register ~40% CAGR over FY10-12E.
Margins surprise positively; asset quality improving
Margins rose 130bps Q-o-Q, to 12.5%, as yield increased 100bps to 19.7%,
while cost of funds grew 20bps. Management indicated that while there was no
across-the-board rate hike, few branches raised rates as and when loans came
for re-pricing, mitigating the impact of lower yields on gold loans. Cost of funds
is maintained at 9.8%, despite rising interest rates. 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 bring margins under
pressure. Hence, we are building in 60bps margin compression over FY10-12E.
SCUF’s gross NPLs came off to 1.79% in Q3FY11 (down 5% in absolute terms).
Provisioning coverage stands at a comfortable 76%; hence, net NPLs came off to
0.4%. Loan loss provisioning increased 43% Q-o-Q (flat Y-o-Y), to INR 335 mn,
due to INR 160 mn on account of general provisioning on standard assets. We
are revising our provisioning estimate upwards to factor in standard asset
provisioning, but expect gross NPAs to remain at less than 2.5% by FY12E.
Outlook and valuations: Positive; maintain ‘BUY’
We believe traction in disbursements will continue, coupled with margin decline,
while asset quality will continue to provide comfort. We broadly maintain our EPS
estimate for FY11 at INR 47.1 and for FY12 at INR 60.8. 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 8.8x FY12E earnings for 24% CAGR in EPS over
FY10-12E and at 1.9x FY12E adjusted book for sustainable RoEs of 20% plus.
We maintain ‘BUY/Sector Outperformer’ recommendation on the stock.
Company Description
SCUF was incorporated in 1986 as a deposit accepting NBFC. Prior to 2002, it was
exclusively engaged in transport finance with special emphasis on financing pre-owned
commercial vehicles to small road transport operators. In 2002, it extended its product
lines to include small-ticket retail financing, viz., consumer durables, two wheelers,
personal, and enterprise loans. It deliberately went slow on disbursements in the CV
segment, which has become a key area of its group company Shriram Transport Finance.
The company’s operations are largely concentrated in the southern states of Andhra
Pradesh, Tamil Nadu, and Karnataka and the western region (particularly Maharashtra).
SCUF offers only small-ticket retail products (ranging from INR 25,000-250,000) with
shorter tenures (12-30 months), which generate yields in excess of 20%. It leverages
the large investor base (1.2 mn investors) of the Shriram Group’s chit fund entities to
continuously build its asset book and utilises 600 chit fund outlets for marketing its
products and collecting loans. The company has been successful in keeping its default
rates at lower levels by better assessment of its customers and effective collection of its
loans and has maintained best in class NIMs at 10-11%.
Investment Theme
SCUF follows a unique and sound business model with presence in the high-yielding,
high-growth, small-ticket retail finance segment (consumer durable finance, auto loans,
personal loans, business finance, and retail gold loans), and superior sustainable RoEs of
20% plus. The concept of chit fund-based lending is gradually losing its sheen and SCUF
aims to fill this space by lending to these customers, thereby retaining decades old
relationships.
Key Risks
SCUF operates in the small-ticket retail finance segment in semi-urban and rural areas
and may face stiff competition from banks, other financial institutions, and multinational
players, which have access to cheap funds. Our earnings estimates may not fructify if the
company is unable to maintain its spreads at expected levels of 10-12% due to inability
to maintain yields at 22-24%, amidst stiff competition. Risk of frauds and NPA accretion
is inherent to the retail lending business and NPA provisioning could be higher than our
estimates in case of any economic slowdown or dip in income levels.
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