Shriram City Union Finance --Strong rural network to drive growth in tough times; Buy :: Anand Rathi Research

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Shriram City Union Finance
Strong rural network to drive growth in tough times; Buy
With 75% of its 650 branches (own + group) in semi-urban and rural
areas, Shriram City Union Finance (SCUF) is geared to benefit from
the rise in rural income levels. Strong loan growth, cost efficiencies and
stable asset quality are expected to drive profitability over FY11-14. We
initiate coverage on SCUF with a Buy rating and a price target of `680.
 Leveraging a strong network to profit from rising rural income.
SCUF is leveraging its wide distribution network in semi-urban and rural
areas (over 75% of its branches) and the strong branch network of group
companies, Shriram Chit Fund and Shriram Transport, in order to benefit
from the rising prosperity of under-banked semi-urban and rural areas.
 Robust earnings outlook despite challenging environment. We
expect strong disbursement growth, backed by robust demand for gold
and SME loans in rural areas, and project 30% CAGR in AUM over
FY11-14. We factor in a 70-bp margin decline due to a rise in wholesale
funding costs in FY12. Operating efficiency is likely to increase as SCUF
leverages the branch networks of group companies over the next 2-3
years. We expect net slippages to be contained below 1% due to the high
proportion of secured assets, and estimate 30% CAGR in net profit over
FY11-14.
 Attractively priced. We estimate RoA at a superior ~3% and expect
RoE to improve from 22% to 25% over FY11-14 on greater leverage.
SCUF, which has a strong consumer retail franchise network, is
attractively priced at a PBV of 1.7x FY12e and 1.3x FY13e.
 Valuation. At our target price, the stock would trade at a PBV of 2.2x
FY12e and 1.8x FY13e. Risks: Slower-than-expected rural economic
growth that could impact loan growth; increase in NPAs.