Margins surprise positively; Growth to be calibrated going forward
* Shriram City Union Finance (SCUF) reported 2QFY19 PAT at INR2.5b under Ind-AS (+6% YoY). Under IGAAP, PAT grew 10% YoY to INR2.4b (11% above estimate). The beat was largely led by better-than-expected spreads.
* Disbursements grew 5% YoY to INR65b. However, excluding gold finance, disbursements were up 16% YoY. SCUF funded ~300,000 two-wheelers (2Ws) in 2Q. However, the past few weeks have been weak for the twowheeler industry on account of change in the insurance norms. Management expects 20-25% decline in two-wheeler sales for the industry in 3QFY19.
* The company managed to keep its spread largely stable on a sequential basis at 11%. Cost of funds has remained largely stable on a sequential basis – largely due to refinancing of high cost liabilities. SCUF has hiked its lending rates to large MSME customers (ticket size > INR2.5m) which should help maintain yields. Hence, compared to the earlier guidance of 40bp yield decline, it is now revised to stable yields, going forward.
* The company is able to draw down on existing bank lines but new lines are taking time. It raised INR3b CP at 8.3% earlier this month. Note that CRISIL upgraded SCUF to AA earlier this fiscal.
* Provisions were largely in line with our estimates at INR2.5b. It was encouraging to note that write-offs declined from INR1.7b in the past two quarters to INR1.5b this quarter. Even bad debt recovery of INR200m was better than the usual run-rate of INR100-120m.
* Valuation and view:
SCUF is a niche play in the retail NBFC space, with a focus on 2Ws and MSME lending. Its business model offers high growth potential with strong profitability. After three years of business and regulatory headwinds, we now expect profitability to pick up. SCUF has maintained spreads well in such a tough environment, which is commendable. However, if such an environment lasts longer, there could be a negative impact on growth and profitability. We increase our FY19/20E EPS estimates by 4-9% to factor in a stronger topline. BUY with a TP of INR2,000 (1.5x FY20E BVPS).
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