>SHRIRAM CITY UNION

Shriram City Union’s net profit grew 42.5% yoy, driven by strong AUM growth, up 62% yoy. The net spread declined 40bps due to the higher cost of funds and back-ended loan growth. We expect strong loan growth and better margins to support profitability in FY13/14. We maintain a Buy.


■ Robust loan growth. AUM grew 62.1% yoy (15.7% qoq) to `11.6bn, driven by robust disbursements in gold loans, up 57% qoq, and SME loans, up 26% yoy. We expect the loan-mix to alter in favour of highyielding more-secured gold and SME loans in the next 1-2 years (~75% of AUM, vs. 60% as of Dec ’11). Off-book loans jumped 90% qoq due to assignment of small business loans by the company.


■ NIM declined ~197bps qoq due to the increase in cost of funds and change in computation of interest expenses – brokerage and commission paid for borrowings are now taken as a part of interest expenses. With the rising proportion of high-yielding loans and softening wholesale borrowing costs, we expect NIM to improve in FY13.


■ Asset quality robust. In 3QFY12, asset quality was robust, with gross and net NPAs largely flat despite the 15.7% rise in AUM, sequentially. SCUF prudentially provided for higher credit cost (33% increase qoq) in order to improve the NPA coverage and to build a buffer for the proposed change in NPA norms by the RBI. NPA coverage (including technical write-offs) was 80%+ as of Dec ’11. With the increasing proportion of secured assets, we expect NPA costs for FY13 and FY14 to be well under 3% of average assets.


■ Valuation. At our price target of `680, the stock would trade at FY12e and FY13e PBV of 2.2x and 1.8x, respectively. Risks: higher-than expected loan growth, margin improvement and stable asset quality.


RISH TRADER