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Managing well through challenges

Shriram City Union Finance (SCUF) posted Q2FY22 PAT of INR2.8bn surpassing estimates on sharper recovery trends. Asset stress, despite uncertainties, was managed well, with gross stage-3 now at 6.9%. This coupled with limited restructuring and low ECLGS disbursement lends comfort. Business momentum has also picked up significantly.

Events over the past two years have tested SCUF’s resilience, particularly given its reliance on the self-employed segment. Ironically, a seasoned underwriting franchise and a strong foothold in the selfemployed segment is what lends comfort on its exposure thereof. A rollover to FY23 and an increase in target to 1.8x (from 1.5x) leads to a revised TP of INR2,630 (earlier INR2,180).

Asset quality holding up; sustenance key

Asset quality showed encouraging trends with gross stage-3 at 6.9% (flat QoQ). Collection efficiency has been on an improving trajectory following a drop in Q1, and sustained improvement thereof is key. Restructuring panned out much lower at INR3.2bn (sub-1% of AUM), in line with management expectations. Going forward, we remain cautious on SME, though improving from the early trough, needs monitoring. It is in SME outcomes, we believe, that the key to SCUF’s future balance sheet health and credit cost outlook lies.

Business momentum: Recovery playing out faster

New business momentum has starter to recover. Disbursements rose >40% QoQ with improvement across product segments, leading to AUM growth of 2.8% QoQ/ 10.5% YoY. Growth continues to be led by the focus segments of business loans. Though disbursement momentum has picked up, its sustainability needs to be seen, which becomes even more important given the upcoming festive season. We believe the next couple of months remain crucial from a growth perspective and will shape the growth outlook for FY22. Given SCUF’s levers for maintaining NIM, we expect core momentum to gradually improve once growth outlook improves along with the rest of the economy.

Outlook and valuation: Faster recovery; maintain ‘BUY’

Events over the past two years have tested SCUF’s resilience, particularly given its reliance on the self-employed segment. The company responded by going slow on growth and recalibrating collection strategies to navigate the tough environment. The stock is trading at 1.5x FY23E P/BV, rendering comfort. Maintain ‘BUY/SN’.

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