Tuesday, February 7, 2012


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.