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Stable performance on asset quality; disbursements recover

* SCUF posted a 4QFY21 PAT of INR2.8b (up 84% off a low base YoY; 7% miss). The miss was driven by NII (8% miss), but was offset by lower credit costs (15% beat). In FY21, PPOP and PAT were largely flat YoY at INR22b/INR10b.

* We lower our FY22E EPS estimate by ~7% to factor in lower topline growth. The company should deliver RoE/RoA of ~16%/4% in FY23E. We maintain our Buy rating with a TP of INR1,900 per share (1.2x FY23E BVPS).

Disbursements stable sequentially; AUM up ~4% QoQ

* In 4QFY21, disbursements across most products were back to pre-COVID levels. MSME disbursements recovered to pre-COVID levels (INR18b), while those in 2W were 30% higher. SCUF commenced LAP (AUM of INR1.9b) in 4QFY21. Until now, it was in the pilot phase.

* As a result of healthy disbursements, AUM grew 4% QoQ to INR296b. As MSME financing has taken a back seat in the past few quarters, its share has declined by over 600bp to 51% over the past year.

* In the HFC segment, loan book grew ~70% YoY to INR39.3b. GNPL ratio improved 53bp QoQ to 1.9%.

Asset quality stable and provision buffer lower

* GNPL ratio improved 10bp QoQ to 6.4%, driven by most products. SCUF reversed some provisions in 4QFY21 – standard asset provisions declined 40bp to 3.8%, while NPL provisions were stable at 53%. Cumulative provisioning of 6.9% of loans is among the highest in our NBFC coverage universe.

* Cost of funds has stabilized at 9.1-9.2% over the past two quarters. Calculated yields (on AUM) stand at 19.5% (down 40bp QoQ). Spreads declined by 30bp QoQ to 10.4%.

Highlights from the management interaction

* With a 6-7% hit rate among eligible customers, the management expects INR6-7b of Personal loan disbursements per quarter going forward.

* From June onwards, it expects 18-20% QoQ growth in the SME segment.

* SCUF (standalone) – 0dpd: 60%, 1-30dpd: 26%, Stage 2: 7.93%.

* HFC – 1-30dpd: 7.2% and Stage 2: 3.2%. For new accounts disbursed in the past two years, over 30dpd stands at 0.4%.

Valuation and view

Since the IL&FS crisis, it has faced issues on the liability front, which led to muted disbursements and loan book growth. However, better availability of debt capital has led to disbursements exceeding pre-COVID levels. In FY22E, disbursements should largely return back to normal levels, though we expect it to be a bit lower in MSME financing. Performance on the asset quality front has exceeded expectations. We now expect credit costs ~2.5% in FY22E/FY23E. We decrease our FY22E EPS estimate by 7% to factor in lower topline. We maintain our Buy rating with a TP of INR1,900 per share (1.2x FY23E BVPS).

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