Published on 15/03/2017 3:42:12 PM | Source: Motilal Oswal Securities Ltd
Buy Shriram City Union Finance Ltd For Target Rs.2,500.00 - Motilal Oswal
Early signs of revival
Streamlining of MSME loan sourcing to help optimize cost structure
* Post demonetization, SCUF was impacted with disbursements growth slowing down to 10% YoY and GNPL rising 45bp to 5.4% (without RBI dispensation). However, the months of January and February have been good, with collection efficiency approaching pre-demonetization levels and disbursements picking up well.
* The streamlining of sourcing of MSME loans should improve employee productivity, resulting in low-double-digit opex growth over next two years.
Almost out of the ‘De-mon’ blues
Management was upbeat on the improvement in collections over past two months. Collection efficiency, which declined 10% in November, has almost returned to predemon levels. However, many borrowers still do not have enough money to clear all overdues. Hence, they may be classified as NPLs, but are actually servicing the loans. Management does not expect any impact on net credit losses. There was a strong pick-up in MSME disbursements in February, after three muted months (possibly due to the lifting of withdrawal restrictions). However, it is yet to be ascertained whether this is pent-up demand or a structural revival in demand.
Improving sourcing efficiencies to help lower costs
Over past few years, SCUF has worked with McKinsey on streamlining of sourcing of MSME loans. Management believes that the new process has improved salesforce productivity from 5 to 7 files per employee per month. The company is well-staffed to support 1-2 years of strong growth and would not need to add to its workforce. Management reiterated its guidance of 10-12% opex growth over FY17-19.
No meaningful threat from accelerating digitization
Management believes that the SME sector formalization would not be indicative of intensified competition from banks, considering i) PSU banks may have the reach, but lack the risk appetite or bandwidth for efficient risk management of such smallticket clients, (ii) private banks, barring a few, are constrained by size and distribution reach and (iii) difficulties in collection – banks are not habituated to going out on the field and collecting money from individual customers. To support this argument, management cited that, after increasing in November/December, the share of non-cash collections declined in January, indicating that customers have gone back to using cash for business and financial purposes.
High provision coverage provides comfort; Return ratios to improve
SCUF has GNPL ratio of 4.5% (5.4% without RBI dispensation), which we believe will rise to 9% by FY19 given the transition of NPA recognition from 150dpd to 90dpd. However, SCUF holds a PCR of 81%, which is higher than most of its NBFC peers like SHTF, MMFS, CIFC and SUF. This provides us comfort that the company will not have to incur severe provisioning charges over the next two years. Strong loan growth, moderate opex growth and lower provisioning charges will help boost profitability over the medium term. We expect RoA/RoE to increase from 3%/12.3% in FY16 to 3.8%/17.6% in FY19.
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