What’s fascinating about SCUF?
Shriram City Union Finance (SCUF), part of the well‐known Shriram Group, has successfully evolved as a mid‐sized diversified lender over the past decade. FY08‐14 AUM CAGR stands at 29% and RoA averaged 3%.
In‐depth penetration, deep local knowledge and access to the ‘Shriram Ecosystem’ lend uniqueness to the business which is nearly improbable to replicate. Strong pricing power manifested in high asset yield of 21‐22%.
The core focus of the company remains small enterprise loans (SEL) where it has a leading market share of 40%+. SEL’s contribution in AUM is estimated to rise from current 52% to 60% by end of FY17.
2w financing book (18% of AUM) is growing faster than industry. Growth and asset quality headwinds in gold loans portfolio (18% of AUM) are largely behind.
Gross NPL levels in SEL portfolio are at healthy 1.8%. Other products exhibiting ‘priced‐in’ level of stress.
Ongoing product mix shift is lowering inherent risk of the business while
elevating profitability structurally.
Acceleration in asset growth (18% CAGR over FY14‐17E) to drive substantial cost leverage. Decline in borrowing cost and product mix shift to improve NIMs further.
Thus, despite transition to 120dpd NPL classification by FY17, RoA would materially expand to 3.7%. Sustainable RoE at 18‐20%.
Room for valuation to go higher
Trading at 2.2x FY17 P/ABV, SCUF’s valuation is attractive in the context of its niche, profitable and high growth business. Relatively, company deserves to trade at premium to peers due to its superior profitability profile. We believe valuation will re‐rate towards 3x FY17 P/ABV in the medium term.
Initiate coverage with a BUY rating and 12‐month price target of Rs2,325.