BUY TP: INR 900.00 - Shriram City :: Religare Resesrch

Strong quarter
SCUF’s Q2FY13 results were largely in line with NII/PAT at Rs 4bn/Rs 1.1bn (up 68% YoY/33% YoY). Business growth was strong with AUM rising 7% QoQ and 59.5% YoY. NIMs on AUM (calculated) were stable at 10.5%. Asset quality was healthy but PAT growth was lower than PPOP growth due to accelerated provisions on NPLs. We remain bullish on SCUF given its niche presence, low base and strong growth potential. We expect earnings CAGR to be 28% through FY15E and ROEs to sustain at ~22%. Maintain BUY

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 Strong business growth: AUM growth was supported by gold loans (up 9.3% QoQ), SME loans (12.2% QoQ) and two-wheeler loans (6.5% QoQ). The proportion of gold and SME loans rose from 70% in Q1FY13 to 72.4%, whereas the proportion of personal loans and CDs dipped further to 4.8% (6% in Q1FY13). We remain bullish on growth and expect AUM CAGR to be 28% through FY12E-FY15E.
 Asset quality healthy: GNPLs/NNPLs were largely stable QoQ. In percentage terms, they dipped 9bps/2bps QoQ to 1.37%/0.32%. GNPLs in SME/gold loans (constituting 72% of total AUMs) were even lower at 0.9%/nil. Provision coverage ratio was healthy at 77%. Provisions increased from Rs 346mn in Q2FY12 to Rs 924mn in Q3FY12, but this included accelerated provisions of ~Rs 220mn. With higher provisions, SCUF’s NPL recognition norms are now at ~120-150 days.
 NIMs stable at 10.5%; decline in short-term rates positive: Calculated NIMs on AUM remained stable at 10.5%. We expect NIMs to further improve from the current levels given the sharp dip in wholesale rates. Employee expenses rose by 37% QoQ due to migration of employees from Shriram Chit Fund to SCUF; however, total operating expenses were in line with estimates at 16% QoQ.
 Maintain BUY with a TP of Rs 900: We believe SCUF provides an opportunity to invest in a highly profitable business model with strong growth potential. Valuations are attractive at 1.6x FY14E BV (without dilution) and 8.0x FY14E EPS.