IGI Logo

Stability demonstrated against all odds; housing finance incremental valuation driver

Despite all odds, Shriram City Union Finance (SCUF) has been consistently reporting stable earnings for the past three quarters. Q4FY21 earnings too were encouraging with disbursement growth of 21% YoY (6% QoQ) driving 4% sequential rise in AUM. Asset quality showed promising trends: 1) stage-3 assets down 9bps QoQ to 6.37%, 2) stage-2 managed at 6%, 3) restructuring at 0.5% of AUM, and 4) credit cost contained lower at 2.5%.

Visibility on uptick in AUM growth, reduced credit cost and superior RoA/RoE profile (3-4%/13-15%) will drive valuations of the standalone entity to 1.3x FY23E adjusted book. Moreso, its housing finance subsidiary, Shriram Housing Finance (SHF), is in a scale phase with further equity support flowing from the parent. Valuing SHF at Rs158 per share, we revise our target price for SCUF to Rs2,080 (earlier: Rs1,443). Maintain BUY. Potential exit of a large investor and proposed mergers within the group can remain an overhang

* Further decline in stage-3 assets is encouraging:

SCUF again managed the portfolio behaviour better than anticipated with stage-3 assets being down 9bps QoQ to 6.37% (153bps lower than FY20). The improvement was broad-based across all segments. Consequently, SCUF delivered well on the provisioning front with annualised credit cost at 2.25%, well below the past 4-quarter average of 3.5% and also well below our estimate of 3.6%. Not only does SCUF carry 53% provisioning on stage-3 but, with covid-related provisioning of Rs5.9bn, it carries 3.8% coverage on stages-1/2 assets. Factoring-in the FY21 credit cost trends and expecting stage-3 to peak at 7.5% in FY22E, we reduce our credit cost estimate to 3.0%%/2.8% respectively for FY22E/FY23E.

* Disbursements led by business loans, 2Ws and personal loans:

Disbursements were up 6% QoQ and 21% YoY for the quarter. The mainstay segment (business loan) disbursements were up 72% QoQ reaching Q4FY20 levels) further supported by 2W loans (up 30% YoY). 30-35% of the disbursements in business lending was to existing customers (with strong repayment track record) and only 4-5% were top-ups. Leveraging the adequate funding lines created the possibility of tap opportunities in personal loans and auto loans. SCUF aims at Rs7bn-8bn of quarterly disbursements in the personal lending segment. Overall, for FY21, disbursements were down 24%, moderating AUM growth during covid crisis to 2% YoY, which was on expected lines. AUM was higher by 1.7% YoY and 3.6% QoQ to Rs296bn. It sounds constructive on scaling up its mainstay SME, 2W and gold lending businesses driving AUM growth of >15% CAGR over FY21-FY23E.

* Launched LAP during Q4FY21:

LAP was introduced as a new product that will help tap bigger ticket-size loans with longer tenure (up to 84 months). A pilot was carried out for almost a year, before rollout in Q4FY21. Average ticket-size would be Rs3.0mn-3.5mn and yields in the range of 16-18%.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer