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Fundamentally encouraging performance; group entities’ merger to weigh on valuations

Despite vulnerable customer and product profile, rise in stress pool was contained in Q1FY22. Stage-3 assets were up mere 54bps to 6.91%, stage-2 pool has risen to 11.68% (vs 7.93% QoQ) and restructuring was hardly 65bps of AUM. Behaviour of 2-wheeler, SME and personal loans surprised positively.

Write-offs pushed annualised credit cost to 4% (higher than expectations) and earnings were dragged below our estimate. Growth disruption was minimal with AUM being flat QoQ. Stance to maintain excess liquidity weighed on NIMs. Last few years’ initiatives of constantly striving to improve franchise quality and field level productivity are gradually yielding results.

Fundamentally, performance was encouraging and improves visibility on growth and superior RoA/RoE profile. Housing finance, in a scaled phase, will be an incremental valuation driver. However, planned merger between group entities will cap re-rating until clarity emerges on structure. We downgrade the stock to ADD from Buy with unchanged target price at Rs2,080.

* Despite vulnerable customer and product profile, rise in stress pool was contained: SCUF again managed the portfolio behaviour better than anticipated with behaviour of 2-wheeler, business and personal loans surprising positively. Stage-3 assets being up mere 54bps QoQ to 6.91% (37bps lower than FY21) and absolute rise in stage-3 was managed sub-15%. 2-wheeler portfolio witnessed 75bps rise in stage-3 to 6.55%, SME stage-3 was up mere 46bps to 7.72% and personal loans up 65bps to 11.07%. Stage-2 pool has risen to 11.68% (vs 7.93% QoQ). Collection efficiency dipped in May to 86% but has recovered in June to 93%.

Not only was coverage on stage-3 sustained at 52% provisioning, but it carried 3.8% coverage on stages-1/2 assets as well. Albeit due to write-offs of Rs2.4 (0.8% of AUM), annualised credit cost settled higher than expectations at 4% at Rs2.9bn (above past 4-quarter average of 3.5%). It incrementally restructured loans of Rs390mn over Rs1.53bn in FY21, taking cumulative restructuring to Rs1.92bn (65bps of AUM). Factoring in Q1FY22 credit cost trends and expecting stage-3 to peak at 7.3% in FY22E, we estimate credit cost at 3.0%%/2.8% for FY22E/FY23E, respectively.

* Disbursements growth led by gold loans and personal loans: Disbursements were down >30% QoQ (albeit up 2.5x YoY) due to sporadic lockdowns and limited business activities. Disbursement growth was led by gold loans and personal loans. AUM was flat QoQ at Rs296bn (up 8.7% YoY). Disbursement in Q1FY22 were 25- 30% short of expectations (in absence of lockdowns). Within its mainstay business of loan segment, it is cautious on SME and focusing more on small business in essential services segment. Around 50-60% of disbursements in business lending was to existing customers (with strong repayment track record) and only 5-6% were top-ups. It sounds constructive on scaling up its mainstay SME, 2W and gold lending businesses driving AUM growth of >15% CAGR over FY21-FY23E.

* Excess liquidity weigh on NIMs; operating profit was flat YoY: SCUF mobilised Rs4.5bn during the quarter with longer-term maturity. Borrowing cost was up 10bps QoQ to 8.2%. At the same time, core yields moderated 20bps (carrying cost of excess buffer and due to mix change) and NIMs compressed >30bps QoQ to 12.4%. Opex was down 7% QoQ (up mere 13% YoY) and operating profit was flat YoY (up 3% QoQ) to Rs5.7bn.

* Infused equity into Shriram Housing Finance during its scale-up phase:

* Operating metrics: Disbursements were Rs2.2bn (vs Rs6.4bn for full year FY21). AUM growth was flat QoQ, up 65% YoY. Given the challenging environment, stage 3 assets have risen from 1.9% to 2.3% QoQ. Incremental restructuring at Rs720mn over FY21 pool of Rs582mn, taking cumulative restructuring to 3.3% of AUM. Net interest income grew 68% YoY, down 10% QoQ. Yield on assets declined 120bps to 12.8% and with 10bps rise in funding cost, NIMs too contracted almost 150bps to 5.5% (30bps adverse delta due to lower assignment income).

* Business dynamics: Initially in the housing finance business, the company followed a focused approach of concentrating on six states (Andhra Pradesh / Telangana, Karnataka, Tamil Nadu, Maharashtra, Gujarat and Rajasthan) and would then gradually penetrate other states. More so, it is creating a blend of affordable housing and midsize segments across the states (based on potential opportunities). It has decentralised underwriting for the selfemployed segment, which required bigger credit and collection teams.

* Equity infused to support growth plans: SCUF has increased its stake in Shriram Housing to 81.16% by infusing Rs2bn in the company. It will infuse further Rs3bn on need basis as and when required as objective it not to be excessively capitalised but maintain adequate capital at all times to support its growth plans. Another approved Rs3bn will be infused in Q3/Q4FY22.

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