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Comfortable liquidity to aid growth; upgrade to Buy

* We upgrade SCUF to Buy from Hold as the Q4FY21 performance justifies that its struggle for liquidity is finally over. Diversification in the lending profile (SME, PL, 2W, gold loans, Housing and LAP) and improving asset quality profile indicate likely earnings surprises in future.

* Recent lockdowns pose uncertainty over growth and asset quality in the near term due to SCUF’s retail-centric lending and its exposure to a low-income customer base. However, its historic track record of collection efficiency, increasing share of secured portfolio and management overlay of Rs7bn (~2.4% of AUM) provide comfort.

* Disbursements during the quarter witnessed steady growth at ~21.3% yoy (+6% qoq) to Rs65.7bn, mainly aided by SME and personal loans (mainly cross-sell). The company also introduced LAP products during the quarter. Incremental borrowing during the quarter amounted to Rs.51.2bn with a weighted average tenure of 38 months.

* We raise our earnings and Adj BV (adjusting for slippage estimates) for FY23E by 11.8% and 16.3%, respectively, and introduce FY24 estimates. Accordingly, we increase our TP to Rs1,950 (Rs1,165 earlier), corresponding to ~1.4x P/ABV FY23E (~1.0x earlier) with RoE of ~14% for FY23E. We upgrade to Buy (OW in EAP) on favorable risk-reward.

Improving trends in liquidity and normalization of business activity drive disbursement growth: SCUF has been witnessing weak growth trends for the past few quarters amid tight liquidity conditions and rising competition, especially from small finance banks (SFBs). However, the company has witnessed a consistent improvement in liquidity position with increasing ability to raise money from banks/retail as well as capital markets. Incremental borrowing in the quarter amounted to Rs51.2bn with a weighted average tenure of 38 months, including issuances of market-linked debentures. Disbursements witnessed steady growth at ~21.3% yoy (+6% qoq) to Rs65.7bn, mainly aided by SME loans (+74.2% qoq). The company also introduced LAP products for customers.

Outlook and valuation: SCUF delivered a steady performance with improvement in asset quality and strong demand revival. We upgrade SCUF to Buy from Hold as the Q4FY21 performance justifies that SCUF’s struggle for liquidity is already over. We raise our earnings and Adj BV (adjusting for slippage estimates) for FY23E by 11.8% and 16.3%, respectively, and introduce FY24 estimates. Accordingly, we increase our TP to Rs1,950 (Rs1,165 earlier), corresponding to ~1.4x P/ABV FY23E (~1.0x earlier) with RoE of ~14% for FY23E. We upgrade to Buy (OW in EAP), considering favorable risk-reward.

The key risks to our call include a weaker-than-expected recovery in rural demand and probable shortage of liquidity. The potential stake sale by Piramal Enterprises in the company remains an overhang on the stock.

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