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Better product mix aided margin; asset quality further improves

Visibility on strong AUM growth

* SCUF 2QFY23 PAT of INR3.5b (8% beat) grew 24% YoY. This was driven by healthy NII/PPoP growth of 28%/19% YoY and benign credit costs of 2.5%.

* 1HFY23 PAT grew ~41% YoY to ~INR7.4b, led by NII growth of ~30% YoY.

* C/I ratio was elevated at ~44% in 2QFY23 (up ~60bp QoQ), driven by 39% YoY increase in Opex. The company guided that the same will reduce to ~38% over the next few years, driven by process efficiencies and digitization.

* Disbursements grew ~50% YoY in 1HFY23 to ~INR178b (v/s INR118b in 1HFY22), reflecting the improving economic environment and healthy credit demand. In 2QFY23, disbursements grew ~25% YoY but flat sequentially at ~INR80b. AUM grew 19% YoY/4% QoQ to ~INR361b.

* Ability to access multiple borrowing sources, including retail fixed deposits, has led to perceptible strength on the liability side. We model an AUM/disbursement CAGR of ~18%/22% over FY22-FY24E. This will lead to a NII/PPoP/PAT CAGR of 21%/20%/25% over the same period. We estimate RoA/RoE of 3.4%/15.5% in FY24 and reiterate our BUY rating with a TP of INR2,220 (based on 1.3x FY24E BVPS).

Asset quality at its best over the last six years; PCR healthy at 46%

* SCUF reported a further improvement in asset quality with GS3 declining ~20bp QoQ to 5.9% (without having to resort to elevated write-offs), while NS3 was stable QoQ at 3.3%.

* SCUF further utilized INR510m of COVID provisions. Post this, the total management overlay stood at ~INR2.9b (~80bp of AUM). We estimate credit costs of ~2.6% in FY22, including gradual utilization of COVID provisions over the course of 2HFY23 and FY24.

Shriram Housing continues to strengthen

* Shriram Housing (SHFL)’s AUM grew 54% YoY/13% QoQ to ~INR65.5b, while 2QFY23 disbursements grew 66% YoY to INR10.5b.

* GS3 declined to 1.5% (down 10bp QoQ) while NS3 was stable QoQ at 1.2%.

* The company guided that it estimates 1+ dpd to deteriorate by ~50-75bp to ~5% over the course of the next 12-18 months.

Confident of sustaining margins at current levels despite rising CoB

* CoB increased ~40bp QoQ. Increase in proportion of personal loans (PL) in the product mix aided yields and margins expanded ~43bp QoQ to 13%.

* Despite imminent rise in cost of borrowing over the next few quarters, the company sounded confident of its ability to reiterate NIM at its current levels of ~13%, aided by improved product mix of high yielding products. The company will not transmit the higher interest rates to the customers.

Highlights from the management commentary

* The management expects the 2W loan book to grow significantly over the next two quarters

* Pilot branches were launched with an idea to cross-sell and train employees so that they can cater to all credit demands of the customer. It expects that by the end of the month, all branches will be cross-selling products. SCUF witnessed increased traction in SME and gold loans from the pilot branches.

Shriram Housing

* Increased rates by 75bp and 25bp in Aug’22 and Oct’22, respectively. The rate hikes have been implemented by increasing loan tenors and not EMIs

* The company does not plan to increase the share of construction finance and corporate loans beyond 8-9% of the loan book. Further, the motive behind growing the same is not to build on construction finance AUM but support growth of retail finance book.

Growth momentum to sustain – reiterate BUY

* Keeping the technical reasons (of a potential supply overhang) aside, the merged entity is expected to emerge stronger than the respective standalone businesses.

* We have increased our FY23 PAT estimate by 7% to account for stronger AUM growth and higher margins. Given the visibility around loan growth/credit costs, we model a PAT CAGR of 24% over FY22-FY24E and an RoA/RoE of 3.4%/15.5% in FY24E. We reiterate our Buy rating on the stock.

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