Shriram City Union Finance (SCUF) posted soft earnings in Q4FY17 due to transition to the 120-day NPL norm, which accounted for >80% rise in GNPLs to 6.73%. Moreover, the company conservatively maintained 73% coverage, leading to higher credit cost. NII was impacted by `560 million interest reversal. Post demonetisation-led weak Q3FY17, growth recovered in Q4FY17 — disbursements jumped >21% q-o-q and AUM grew 3% q-o-q.
Performance of housing finance subsidiary was soft — AUM dip of 3% q-o-q, GNPLs rose to 5.3%, ex-ARC sale. Demonetisation has tested SCUF’s business resilience given its dependence on self-employed segment; recovery trends are encouraging. Given >4% RoA, healthy >23% CAR and robust customer franchise, maintain Buy.
GNPLs rise on transition to 120-dpd recognition; coverage healthy
GNPLs rose to 6.73% as SCUF transitioned from 150-dpd to 120-dpd NPL recognition norm. However, it continued to maintain higher coverage ratio of 73%, which kept credit cost elevated. Further, of the assets which had RBI dispensation, 60% were recovered during the quarter; management expects to recover balance over the next few quarters. SCUF has to transition to 90 dpd by FY18 and enhanced coverage provides it with the ability to make the transition while efficiently managing the P&L impact.
Growth on track; sustained momentum holds key
After demonetisation-led blip in Q3FY17, disbursements rebounded — up >21% q-o-q — leading to AUM spurt of 3% q-o-q. Disbursement surge was driven by improved traction in gold loans and small businesses. Meanwhile, 2-wheeler segment continued to be soft. Management aims to clock 20-25% non-gold AUM growth largely driven by SME, but GST implementation will be key monitorable.
Outlook and valuations: Growth momentum key; maintain ‘BUY’
Demonetisation has tested business resilience; however, robust franchise and strong business practices have helped SCUF to recover swiftly. We estimate AUM to log 20-22% CAGR over FY17-19e and >45% earnings CAGR, in turn delivering RoA/RoE of >4% /19-20%. We maintain ‘BUY/SO’ with TP of ` 2,490 (on 2.7x FY19E P/ABV). Key monitorable: GST implementation.
NIMs impacted by interest income reversal on transition
NIMs came in at 12.5% largely following lower lending yields, impacted by Rs 560m interest income reversal. On the other hand, the impact was cushioned by lower funding cost. Given benign interest rates scenario and focus on driving large part of incremental growth from relatively higher yielding loans, we expect NIMs to be broadly stable around 13.7-13.9% going ahead.