Published on 9/07/2020 12:30:59 PM | Source: ICICI Securities Ltd

Hold Shriram City Union Finance Ltd For The Target Rs.695 - ICICI Securities

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Tight liquidity dictates balancing act

Barring lockdown impactin the last week of March, Q4FY20 was an operationally stable quarter for ShriramCity Union Finance (SCUF). Company reported Q4FY20 standalone  disbursements  of  Rs54.2bn  (down  7%  QoQ).  PAT  for  the  quarter stood  at  Rs1.53bn,  down  39%  YoY  and  48%  QoQ,  primarily  because  of  Covid-19 provisions of Rs4.3bn (~145bps of average AUM). Moratorium in the MSME and 2-wheeler (2W) books stood at ~75% and ~50% respectively. Key positives include: 1)   collection   across   product   segments   improved   with   aggregate   efficiency increasing from ~34% in April to ~53% in May; 2) liquidity at ~Rs20bn as at May-end,arguably  still  tight,  was  helped  by  collections  of  ~Rs15.7bn  in  April/May;  3) new/used  2W  and  gold  loan  segmentsoffer  considerable  promise  from  the demand  side,  but  outlook  on  SME behaviorremains  uncertain.  Also,  economic and   credit   cycle   disruption will   makethe   space   more   vulnerable,   thereby increasing the risk of asset quality deterioration.Maintain HOLD.

* Collection  efficiency exhibited  MoM  improvement  across  segments: In  2W, SME, personal loan  andauto  loansegments,  collection  efficiency  stood  at  55%, 25%,  45%and45%  respectively  in  May. Collection  efficiency  in  the  non-gold segments improved from ~34% in April to ~43% in May. Branches reopened in May and SCUF collected~Rs3.2bn in the gold loan business.

* Expect  liquidity to  remain  tight  in  the  foreseeable  future: SCUF  mobilised Rs36.4bn  during  the  quarter  through  institutional  NCDs,  banks,  securitisation  and retail  fixed  deposits.  As  expected, commercial  paperin  the  borrowing  mix  has almost  completely  run  off.  Though  SCUF  leveraged  securitisation extensively  in Q4FY20,  any  new  securitisation  (except  under  PCG  scheme)  will  be  difficult  in H1FY21.  Moreover,  given  its  customer  profile  and  product  segments,  banks  and debt-investors   are  likely   to   remain   risk-averse;   hence   raising   newer   lines   of borrowing will be relativelydifficult and incremental costs too will remain elevated. 

* Disbursements  in  new/used  2W  and  gold  loan  segments  show  promise,  but SME  and  PL  likely  to  remain  muted: SCUF  exercised  caution  in  personal  loan (PL) disbursements in Q4FY20. Given the unsecured nature and higher vulnerability in  PLs,  we  expect  the  company  to  maintain  caution  in  this  segment  as  well  as MSME  in  H1FY21.  New/used  2W  and  gold  loans  show  considerable  promise  from the demand-side and SCUF would be looking to maintain its market share (financed >50k new 2Ws in May) in new 2W financing segment despite tight liquidity.

* Outlook,  valuations  and  risks: We  model  an  AUM  CAGR  of  ~6%  over  FY20-FY22E  and  build-in  credit  cost  of  ~4%  for  FY21E  with  the  economic  dislocation leading to  deterioration  in  asset  quality.  We  value  the  standalone  business  at  0.5x FY22E  P/BV  (unchanged).  Our  SoTP-based (table-3)valuation  leads  to  a  target price  of  Rs695  (earlier:  Rs708).  Maintain HOLD.  Potential  exit  of  a  large  investor and the proposed mergerswithin the group would remain an overhang. Key upside risks  include  a  sharp  recovery  in  the  economy  leading  to  better  asset  quality experience,and a well-executed stimulus package for MSMEs.


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