01-01-1970 12:00 AM | Source: Emkay Global Financial Services Ltd
Buy Shriram City Union Finance Ltd For Target Rs. 2,500 - Emkay Global Financial Services
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Operating expenses remain elevated, going into the merger

Shriram City Union Finance (SCUF) reported Q2FY23 PAT of Rs3.5bn, coming in 2% below our estimates due to higher-than-expected operating expenses. Disbursements grew 1.1% QoQ/24.9% YoY, led by the SME, Personal loan (PL) and LAP segments, while share of 2Ws and pre-owned 2Ws declined 119bps and 65bps QoQ, respectively. AUM grew 4.4% QoQ/18.7% YoY. Calculated NIMs rose by 43bps QoQ to 13.1%, with yields rising 69bps QoQ due to strong disbursement momentum in higher-yielding loans and the 50-bps rate hike in the gold loan segment. Cost-to-income increased 63bps QoQ to 43.8%, due to increase in gold loan branches (from 986 to 1,021 branches) and personnel additions (from ~28,000 to ~30,600), resulting in PPOP growth of 4.8% QoQ/19.3% YoY. Asset quality improved QoQ, with GS3 and NS3 declining 18bps and 3bps to 5.93% and 3.29%, respectively. PCR declined 102bps to 46.1%. Management overlay stood at Rs2.9bn (0.8% of AUM) vs. Rs3.4bn (1% of AUM) in Q1FY23. Factoring-in the utilization of overlay provisions, credit costs declined 14bps QoQ to 2.55%.

Shriram Housing Finance (SHFL) clocked PAT at Rs0.34bn (+13% QoQ/81% YoY). SHFL saw its highest-ever quarterly originations in Q2, exceeding Rs10bn. Disbursements grew 31.9% QoQ/65.7% YoY. AUM as of Sep-22 stood at Rs65.5bn, with share of core home loans at 59% (Q1: 60%). Asset quality moderately improved, with GS3 & NS3 declining 3bps & 4bps QoQ to 1.52% & 1.17%, respectively. PCR rose to 24.2% (Q1: 23.6%).

For SCUF, management guidance indicates NIMs will be maintained at 13%. Opex-toAUM is expected to moderate post-merger, with the ability to plug into the wider Shriram network. Credit cost is expected to be in the 2-2.5% range going ahead.

Considering the merger of SHTF with SCUF, we had previously linked our TP for SCUF with that of SHTF, using the merger-share ratio, i.e. ~1.55x. We retain our BUY rating with an unchanged Sep-23E TP of Rs2,500, for FY24-25E RoE of ~15%. Key downside risks: 1) stake-sale by current investors; 2) merger-integration related.

What we liked: 1) Sustained growth momentum in higher-yielding LAP and personal loans bodes well for margins. 2) Positive commentary on integration aspects of the merger. 3) Highest-ever quarterly originations for SHFL, with the lowest BT out in the past 4 quarters.

Earnings call KTAs: SCUF expects SME and 2W loan demand to be strong in H2FY23, backed by the festive season, with 2W disbursement growth aided by higher ticket size. 2) SCUF aims to introduce new unsecured lending products through its digital platform, in coming 2-3 years. 3) SHFL raised its lending rates by 75bps in Aug-22 and by 25bps in Oct-22; it expects margins to sustain at current levels of 7.2% and potentially improve by 20bps. 4) SHFL has passed-on the rise in borrowing costs to its customers, via increasing the loan tenure instead of the EMI. 5) SHFL plans to raise ~Rs20bn via borrowings, with NHB funding of Rs10-12bn expected to be received in Nov-22.

Changes in estimates: 1) We increase our cost-to-income forecasts, to factor-in the elevated operating expenses going into the merger. 2) We reduce our credit cost estimate to consider the utilization of COVID overlay provisions over FY23-24. (Exhibit 3).

 

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