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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