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Steady performance in an uncertain period

* SCUF has delivered operating performance in line with our estimates, but higher provisions (+76.5% qoq) dragged profitability down to Rs2.1bn (+8.2% yoy, -26.3% qoq) vs. our estimate of Rs2.4bn. Margins dipped to ~12.4% in Q1 from ~12.7% in Q4FY21 on account of lower yields amid interest reversals and a rise in the secured portfolio.

* Disbursements witnessed a sequential decline to Rs45.6bn (+2.4x yoy) amid a seasonally weak Q1 and weak demand due to lockdowns. Gold loans witnessed a surge, whereas unsecured SME loans saw a decline. AUM saw muted growth of ~4.1% yoy (flat qoq) to Rs296bn due to weak disbursements and the normalization in repayments.

* The company reported a sequential rise in Gross Stage 3 to 6.91% (+54bps qoq) and Net Stage 3 increased to 3.46% (+38bps qoq). PCR remained steady at 51.7% vs. 53.2% last quarter. Total restructured portfolio (consolidated) remained negligible at Rs3.2bn (0.96% of consolidated AUM). Management overlay remained flat on sequential basis at Rs.7.1bn.

* We upgraded SCUF to Buy in Q4FY21 on the improved liability profile and diversified asset portfolio. We roll forward to Sept’22E with a revised TP of Rs2,100 (Rs1,950 earlier), corresponding to ~1.4x ABV with an RoE of ~14.6% for Sept’23E. Maintain Buy (OW in EAP) due to healthy performance and diversified growth.

Improving trends in liquidity and digitalization of processes to drive business 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 seen a consistent improvement in the liquidity position with an increasing ability to raise money from banks/retail and the capital markets. The company is also moving toward the digitalization process, under which 2W/personal loans will be digitally-driven. Gradually, all segments should be operating digitally, supporting growth further.

Housing subsidiary sees improvement:

Shriram Housing Finance, a subsidiary of SCUF, has witnessed healthy disbursements of Rs2.2bn with an AUM of Rs39.1bn. SCUF invested Rs2bn in the housing finance arm in Apr’21 and its stake has increased to 81%. Management plans to further invest Rs3bn during FY22. This unit is witnessing strong traction and could lead to a potential re-rating for the company in the future.

Outlook and valuation:

SCUF delivered a steady performance in Q1, with improvement in asset quality and strong demand revival. We roll forward to Sept’22E with a revised TP of Rs2,100 (Rs1,950 earlier), corresponding to ~1.4x ABV with an RoE of ~14.6% for Sept’23E. Maintain Buy (OW in EAP) amid healthy performance and diversified growth.

Key risks:

A weaker-than-expected recovery in rural demand and a probable shortage of liquidity. The potential stake sale by Piramal Enterprises in the company remains as an overhang on the stock.

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