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Business momentum improves; asset quality deteriorates

Suryoday SFB (Suryoday) reported net loss of Rs477mn in Q1FY22 impacted by higher provisions at Rs1.1bn (~2.75% of AUM) vs Rs0.52bn in Q4FY21. Lower interest reversal at Rs78mn vs Rs658mn in Q4FY21 resulted in sharp >100% QoQ growth in NII.

Opex was down 5% QoQ which, coupled with strong revenue recovery, led to a positive PPoP at Rs540mn vs a negative Rs52mn in Q4FY21. Disbursements fell 66% QoQ to Rs3.6bn, but revived to Rs3.6bn in Jul’21 and sustained in Aug’21. While GNPL remained flat QoQ at 9.5% (PAR 90+ at 6.4%), standard restructured book increased to 8.7% from 2.7% in Q4FY21.

Collections improved to 79% in Jul’21 from 70% in Jun’21 and, notably, ~75% of delinquent customers (~34% of loans) were paying over Jun/Jul’21. Near-term asset quality concerns persist, given ~23% collections in MFI restructured loans (Rs3.3bn) in Jun’21 (~35% in Jul’21). However, adequate capital at 47.6%, cost leadership, and gradual normalisation of credit cost, its likely to revive RoA to 1.8% by FY23E. Maintain BUY with a target price of Rs310.

* Core performance improved sequentially. Disbursements during Q1FY22 were down >60% QoQ, but the same picked up sharply in Jul’21 to Rs3.6bn. Sustained momentum in Aug’21 improves visibility on AUM growth surpassing the FY21 level of 19%. Overall AUM fell 5% QoQ while it grew 13% YoY. The share of retail deposits further increased to 86% vs 80% in Q4FY21; similarly, CASA ratio expanded to 16.2% from 15.4% in Q4FY21.

PPoP turned positive at Rs540mn vs a negative Rs52mn in Q4FY21 driven by sharp >100% QoQ growth in NII and 5% QoQ decline in total opex. Lower interest reversal at Rs78mn vs Rs658mn in Q4FY21 was the key earnings driver. However, higher write-offs at Rs785mn and provision of Rs278mn towards incremental restructuring resulted in Suryoday reporting a net loss of Rs477mn.

* GNPL remained sequentially flat, but standard restructured portfolio increased to 8.7% vs 2.7% in Q4FY21. Suryoday’s asset quality performance remains sub-par with: a) GNPLs at 9.5%, b) incremental restructuring of ~7% (total restructured pool stands at 8.7%), and c) write-offs at Rs785mn. This however is on expected lines considering the SFB’s predominantly MFI exposure and higher Maharashtra exposure.

While collections fell sharply in Jun’21 to 70% from 87% in Mar’21, it improved in Jul’21 to 79% and, as per management, Aug’21 too is showing an encouraging trend. While sub-23% collections in the restructured portfolio raise concerns about future asset quality, collections from ~75% of delinquent customers (34% of loans) over Jun/Jul’21 provide some comfort on likely lower LGDs on optically higher stress.

* Key risks: a) Stress unfolding higher than expected, and b) further deceleration in AUM growth from Q1FY22 level.

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