Initiating Coverage |17 January 2017
Sector: Financials/NBFC
Shriram City Union Finance
The Quintessential NBFC
Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 6129 1539
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com)
/ Sunesh Khanna
(Sunesh.Khanna@MotilalOswal.com); +91 22 3982 5521
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Shriram City Union Finance
Contents |
Shriram City Union Finance: The Quintessential NBFC
Summary ............................................................................................................. 3
Capitalizing on strong growth opportunity in MSME .............................................. 5
MSME offers massive financing opportunity ......................................................... 9
Two-wheeler – A segment difficult to assess ....................................................... 11
Gold loan book stable; Personal loans to drive growth ........................................ 13
SWOT analysis .................................................................................................... 16
Consolidation over; growth revival to drive earnings ........................................... 17
Bull & Bear case ................................................................................................. 23
Valuations and view ........................................................................................... 25
Key risks ............................................................................................................. 27
Company Background ......................................................................................... 28
Chit Fund: How it works...................................................................................... 30
Shriram Housing Finance: Nascent business ........................................................ 32
Financials and valuations .................................................................................... 33
Why is SCUF a Quintessential NBFC?
NBFCs were started with the intention to serve customer segments that banks do
not cater to. SCUF has developed expertise over the years to capture this
segment in a cost-efficient way, ensuring sufficient returns for its shareholders
too. Considering significant banking under-penetration in this niche segment,
there will always remain significant opportunities for NBFCs like SCUF to grow.
17 January 2017
2

Shriram City Union Finance
BSE Sensex
27,288
S&P CNX
8,413
Shriram City Union Finance
Initiating Coverage | Sector: Financials
CMP: INR1,849
TP: INR2,500 (+35%)
Buy
The Quintessential NBFC
Tapping the untapped market
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
12M Avg Val (INR M)
Free float (%)
SCUF IN
65.9
2650 / 1337
3/2/18
117.3
1.8
98
66.2
Financial Snapshot (INR b)
Y/E March
2017E 2018E
NII
27.9 32.8
PPP
16.3 19.4
PAT
6.6
8.2
EPS (INR)
101
125
EPS Gr. (%)
25
24
BV/Sh. (INR)
766
869
RoA (%)
3.3
3.6
RoE (%)
13.9 15.3
Payout (%)
19
17
Valuations
P/E (x)
18.4 14.8
P/BV (x)
2.4
2.1
Div. Yield (%)
0.9
1.0
2019E
39.9
24.1
10.4
157
26
1000
3.7
16.8
17
11.8
1.8
1.2
Shriram City Union Finance (SCUF) is a diversified NBFC with strong expertise in
low-ticket-size and high-growth products like micro, small and medium enterprise
(MSME) and two-wheeler (2W) lending.
SCUF’s key strengths are a) a large customer base with long-term relationships
directly or through group companies, b) strong local knowledge and ability to
appraise businesses dealing in cash (requires strong on-the-ground knowledge)
and c) robust recovery mechanism.
With strong capitalization (Tier I of 23%+), improving return ratios (3.7% RoA,
16.8% RoE by FY19E) and robust AUM CAGR of 19% over FY16-19E, the stock
should deliver 35% return over next 12 months, in our view. We initiate coverage
on SCUF with a Buy rating and a target price of INR2,500.
A sustainable model to tap an untapped market
Loan appraisals/collections for businesses largely dealing in cash require strong
on-the-ground knowledge. NBFCs like SUCF are well placed to capture this
segment with their local knowledge, cost-efficient business model and robust
recovery mechanism. SCUF also relies on the large pool of Shriram Chits’
customers to grow its business and gain information on customer
credit/repayment history. With significant opportunities in place, we expect
SCUF to deliver AUM CAGR of 19% over FY16-19E.
Shareholding pattern (%)
As On
Sep-16 Jun-16 Sep-15
Promoter
33.8
33.8
33.8
DII
5.8
2.0
2.3
FII
17.5
16.1
15.1
Others
43.0
48.1
48.8
FII Includes depository receipts
MSME – Banking on high volume and low ticket size
MSME financing accounts for more than half of SCUF’s loan book, with the
company targeting customers with credit requirement below INR2.5m.
At
INR0.5m, the average loan ticket size of the company is significantly lower
than the ticket size of business loans (LAP) of other NBFCs.
Around 85% of the
book is backed by property collateral, mostly self-occupied residential. Apart
from robust growth opportunities in this segment, strong collateral also ensures
healthy asset quality and lower loss given default.
Shriram City Union Finance
The Quintessential NBFC
Market leader in 2W financing
SCUF has significant presence in 2W financing (~18% of its loan book).
With a
network of 6,000 dealers, SCUF is India’s largest 2W financier by volumes,
disbursing ~75,000 loans a month.
It usually commences business in a new
geography with 2W financing, which, in our view, is an apt strategy given that it
is a mass market product. Here, it mostly targets self-employed customers who
find it difficult (due to tedious paper work) to secure finance from banks. This
helps SCUF on two fronts: (1) to gain foothold in a new territory and (2) to
understand credit behavior of the self-employed segment in the region.
Piran Engineer
+
91 22 3980 4393
Piran.Engineer@motilaloswal.com
Please click here for Video Link
17 January 2017
3

Shriram City Union Finance
Stock Performance (1-year)
Temporary blip due to demonetization
Over last two months, cash flow issues (due to cash crunch post demonetization)
and moderation in economic activities impacted growth for SCUF. We see this as a
temporary blip as the cash situation at the ground level is improving rapidly.
Demand for credit in the target customer base remains high, and most of the loans
are for income generation. Hence, beyond a temporary blip, we do not see any
significant impact on medium- to long-term growth and asset quality.
Strong earnings CAGR of 25% over FY16-19E
With strong capitalization and capacity in place, SCUF is expected to record AUM
CAGR of 19% over FY16-19E. Also, with strong pricing power in the target customer
segment, falling interest rates should be beneficial for margins. Robust growth
would also drive operating leverage (expect cost-to-average AUM to decline to 5.4%
in FY19 from 5.8% in FY16). While NPA recognition transition to 90dpd would
increase GNPLs in the interim, we expect net credit losses to remain unchanged.
With margins improvement, operating leverage and higher leverage on equity, RoE
should approach 17% by FY19. We expect earnings CAGR of 25% over FY16-19E.
Improving return ratio, strong growth; Initiating with Buy
With a large employee base of ~25,000 and branches totaling ~1,000, SCUF has built
the infrastructure to support its AUM growth. Also, strong capitalization (Tier 1 of
23%+) would ensure dilution-free growth for the company. RoAs/RoEs are expected
to improve to 3.7%+/17%+ by FY19E. We value the company at 2.5x FY19E BV based
on Residual Income model. Our key assumptions are Rf of 7.0%, CoE of 13.5% and a
terminal growth rate of 5%. The stock has corrected ~20% since 8 November 2016.
We thus initiate coverage with a
Buy rating and a target price of INR2,500.
Exhibit 1: Valuation comparison
FY17E
Shriram City Union Finance
3.3
Shriram Transport Finance
2.2
Bajaj Finance
3.3
Mahindra & Mahindra Finance
1.9
Cholamandalam Investment & Finance 2.4
RoA
FY18E
3.6
2.5
3.3
2.0
2.5
FY19E
3.7
2.7
3.4
2.0
2.6
FY17E
13.9
13.4
21.1
11.3
18.1
RoE
FY18E
15.3
15.4
22.8
11.9
19.0
FY19E
16.8
16.6
25.4
12.0
20.3
FY17E
2.4
1.9
5.5
2.4
3.5
P/B
FY18E
2.1
1.7
4.5
2.2
2.9
FY19E
1.8
1.5
3.6
2.0
2.5
FY17E
18.4
15.2
28.3
22.4
20.7
P/E
FY18E
14.8
11.8
21.8
19.4
16.7
FY19E
11.8
9.6
15.9
17.6
13.1
Source: Company, MOSL
17 January 2017
4

Shriram City Union Finance
Capitalizing on strong growth opportunity in MSME
~70% of Shriram Chits customers yet to be tapped
SCUF operates on a differentiated business model. It taps the large customer base of
Shriram Chits, gaining access to customer credit history and repayment records. This
helps in credit appraisal and thus reduces asset quality risk.
SCUF operates on a ‘hub and spoke’ business model, where loan origination/disbursal
decisions are vested with the branches. This expedites the decision-making process.
Its no-outsourcing policy (with loan origination, credit evaluation and collections done
by in-house teams) provides greater control over customer service and asset quality.
Niche customer base - Focus on MSME segment
SCUF’s MSME financing is
different from other NBFCs
with much smaller ticket
sizes (~INR0.5m) and
differentiated loan sourcing
(via Shriram Chits)
SCUF benefits from moderate competitive intensity in the target customer base. The
difficult for banks to match SCUF’s informal relationship-based appraisal and
collection methodologies in rural areas and quick turnaround time gives the
competitive advantage. In addition, the small ticket sizes and high volumes dissuade
banks from pursuing this segment of customers.
As SCUF operates predominantly in self-employed customer segments (where most
financiers struggle, owing to lack of proper documentation), origination and
appraisal processes assume critical importance. SCUF reduces risk by: 1) closely
linking the loan sanction process to the proper assessment of the repayment
capacity of the borrower; and 2) in-housing all processes by using the large chit fund
employee base. We believe that even with improved digitization over the coming
years, this segment will continue to be under-catered by banks due to the above-
mentioned reasons, thus offering huge potential to financiers like SCUF.
Exhibit 2: SME financing – Snapshot
What?
Ticket size
Sourcing
Geographies
Competitors
Average yield
Tenure
Basic criteria for
lending
Customer profile
Loan underwriting
LTV
Collateral
Branch network
TAT
Description
INR0.1-2.5m (Average: INR0.5m)
90% sourced in-house (40% from chit fund database). 10% of business (from Maharashtra & Gujarat) sourced from
agents
AP+TN (60%); Mah+Guj+MP+Raj (15%). Primarily semi-urban areas. Avoid rural areas
Regional banks like CUB, KVB, SIB are competitors in a few regions in higher ticket size loans
20-21%
3 years
Borrower should have been in business for 3 years and should be making profits. Business should be scalable
75% are traders. Around 20-25% are repeat customers
At branch level (except for very high ticket size loans)
55%
85% of book is collateralized against property (generally self-occupied residential), rest against chit funds
65-70% of total branches conduct SME lending
1-3 weeks
Source: MOSL, Company
17 January 2017
5

Shriram City Union Finance
Exhibit 3: Segment-wise AUM mix; SME and Personal loans to gain share
Personal
5
10
18
36
29
FY12
4
13
12
30
2W
3
18
10
17
51
4
18
7
18
Auto
5
18
6
17
Gold loans
7
18
5
14
9
17
4
13
SME
11
17
3
12
40
FY13
53
54
56
57
57
FY14
FY15
FY16
FY17E
FY18E
FY19E
Source: MOSL, Company
Capitalizing on the strong customer base of Shriram Chit funds
So far, SCUF has only mined
~20-25% of the total
database of Shriram Chits.
There is significant room to
grow just from this
database
SCUF leverages the large customer base of Shriram Group companies, especially
Shriram Chits, to source customers for its small enterprise loans business. SCUF is
able to access customers’ credit history and repayment records at Shriram Chits,
which helps in credit appraisal and thereby reduces asset quality risk. SCUF only
targets Shriram Chits’ customers who have a vintage of at least six months.
SCUF’s target customers, especially small enterprise owners, sometimes do not have
sufficient movable and/or immovable property which they can provide as security
for loans. In such cases, chits from group companies are accepted as collateral via a
lien.
SCUF only finances customers who have certain vintage with Shriram Chits and who
have been in business for at least two years. This enables the company to gather
enough data to evaluate customers’ credit behavior. At present, around 80% of its
customers are either Shriram Chits’ clients or are referred by them. That said, SCUF
has only mined ~20-25% of Shriram Chits’ customer base. Thus, the company has
enough room to grow the client portfolio.
Decentralized decision making with no-outsourcing policy
Providing the funding requirements of customers not having commonly proper
documents warrants a deep local set-up and a sizeable field force having skills in
gauging cash flows of the enterprise and loan recovery. The operations are
decentralized with key decisions and processes executed at the branch level.
Responsibility of loan
origination and recoveries is
vested with the branch
SCUF operates a ‘hub and spoke’ business model, where responsibilities from loan
origination to recoveries are vested with the branches. This ensures speedy credit
approvals and more efficient turnaround time in processing loans. Branch managers
are authorized to approve all loan products. Also, variable pay of branch officials is
linked to the asset quality of loans they have originated and disbursed.
SCUF has no-outsourcing policy, with loan origination, credit evaluation and
collection done by in-house teams (barring some parts in Maharashtra and Gujarat).
Further, officials involved in loan origination are also responsible for its servicing and
recovery.
17 January 2017
6

Shriram City Union Finance
Well positioned in top MSME states
Over 80% of AUM is from
TN, AP, Karnataka and
Maharashtra
Four states (Andhra Pradesh, Karnataka, Tamil Nadu and Maharashtra) contribute
over one-third of India’s GDP. In addition, these states account for over 30% of total
MSMEs in India. SCUF has positioned itself well in these states with its strong
presence. Given its strong branch network and presence of other group companies
in these states, SCUF is well acquainted with these markets and has good
understanding of the local business culture.
Exhibit 5: SCUF’s branch network
323
Mah
285
Branches
Exhibit 4: State-wise contribution to India’s GDP (FY15)
14
36
8
8
4
7
4
5 6
7
UP
TN
Guj
WB
Kar
Raj
Source: GoI data
Source: MOSL, Company
94
74
31
25
23
16
15
12
11
10
8
Secured small business loans offer attractive yields
SCUF lends to small businesses that have credit requirement of INR0.5-1m (average
of INR500,000). Business owners in this segment lack proper documentation on
income and cash flows as most of their business transactions are done with cash.
Thus, banks and other financial institutions find it difficult to appraise this segment.
Relatively high risk and low competitive intensity leads to higher yield of 20-22% on
small businesses.
Exhibit 6: Yields in small business loans are attractive
27%
25%
Avg. Yield (%)
24%
Exhibit 7: Higher tenor for small business loans
36
Avg. Tenor (mnths)
30
30
24
21%
16%
4
Personal
loans
Auto Loans
Two
Wheelers
Small
Gold Loans
Enterprise
Source: MOSL, Company
Small
Auto Loans
Enterprise
Personal
loans
Two
Wheelers
Gold Loans
Source: MOSL, Company
Loans to small business owners are secured. In case the borrower is a customer of
Shriram Chits, the chits are also used as collateral. In other cases, the borrower’s
immovable property (mostly residential self-occupied) or other assets are used as
collateral.
17 January 2017
7

Shriram City Union Finance
Exhibit 8: Ticket size is also higher for small enterprise loans
500,000
Avg. Tkt Size (INR)
6.68
5.96
5.34
4.91
2.42
75,000
Small
Auto Loans
Enterprise
Personal
loans
40,000
Gold Loans
35,000
Two
Wheelers
Auto Loans
Personal
loans
MSME
2W loans
Gold loans
Exhibit 9: GNPA ratio as of 2QFY17 (150dpd)
150,000
Source: MOSL, Company
Source: MOSL, Company
GNPL in the MSME lending book is currently elevated due to the significant stress
experienced by the MSME sector. However, secured nature of lending will result in
low ultimate credit losses in the segment. We expect small business loans to be a
significant growth driver for the company. The share of small business loans in the
overall AUM mix is expected to increase to 57% from 54% in FY16.
Exhibit 10: AUM growth will continue to be robust in SME segment
AUM (INR b)
75
63
Growth (%)
25
31
FY11
39
FY12
63
FY13
18
75
FY14
18
89
FY15
19
106
FY16
18
125
FY17E
23
153
FY18E
22
187
FY19E
Source: MOSL, Company
17 January 2017
8

Shriram City Union Finance
MSME offers massive financing opportunity
MSME sector lacks sufficient access to formal financing
~36m MSMEs in India account for ~45% of manufacturing output and contribute 8% of
the nation’s GDP.
MSME is credit starved, despite total banking sector credit of INR8t to the sector. IFC
estimates total credit shortfall of INR26t for the MSME sector.
MSMEs usually lack documents required for credit appraisals. This, along with higher
credit costs, makes it difficult for banks to lend to this segment.
MSME sector, a critical cog in India’s growth machinery
MSME sector is critical to
the economy, with a
contribution of over 45% to
total manufacturing output
The MSME sector is critical part of India’s growth machinery, with ~36m enterprises
across different industries employing over 80m people in 2012-13. In addition, the
MSME sector accounts for ~45% of India’s total manufacturing output and
contributes well over 8% annually to India’s GDP. With the government’s impetus on
manufacturing in order to create jobs and revive economic growth in the country,
we expect the MSME sector to grow at above GDP growth rate over the medium
term.
Exhibit 11: Definition of MSME
Category/
Manufacturing
Services
Initial investment in plant & machinery (in INR m)
Micro
Small
<2.5
2.5-50
<1
1-20
Medium
50-100
20-50
Source: MSMED Act, IFC, MOSL
IFC estimates INR19t credit funding shortfall for MSMEs
Total capital requirement
for MSME segment is
estimated at INR26t, of
which INR19t is the debt
gap
Total bank credit to the MSME sector grew at a CAGR of +25% to INR7.9t over FY05-
14. Yet, the MSME sector is severely credit starved. According to a report by IFC-
Intellicap, total finance requirement of the MSME sector is INR32.5t, of which the
debt requirement amounts to INR26t. Hence, there is a huge shortfall of credit
provided by banks to the MSME segment. This shortfall is addressed by NBFCs as
well as other informal sources such as local moneylenders, family & friends, chit
funds, etc. IFC estimates that formal sources cater to only 22% of the total MSME
debt financing.
Exhibit 12: Overall finance gap in the MSME sector (INR t)
4.6
7.0
32.5
27.9
20.9
19.0
1.9
Total finance
demand
Entrepreneur's
contribution
Potential finance
demand
Formal supply
Total finance gap
Total debt gap
Total equity gap
Source: MOSL, Company, IFC-Intellicap report, ‘Providing venture debt to the MSME Sector in India’, 2012
17 January 2017
9

Shriram City Union Finance
Banks focus more on
higher-ticket-size loans
Higher costs and difficulty in credit appraisal limit bank lending…
Commercial banks usually find difficult to service the micro and small enterprises
segment due to the smaller ticket size, lack of formal documents of the borrower,
irregularity of cash flows and recovery (which are generally outsourced by banks)
cost. Furthermore, banks follow a standardized credit appraisal process and rely
heavily on documentary evidences to assess credit worthiness of borrowers.
However, most MSME business owners, especially the smaller ones, find it difficult
to provide such documents as most of their transactions are still cash-based. Thus,
banks prefer to focus on relatively high ticket loans where credit appraisal is much
easier and transaction costs are lower.
…present significant lending opportunity for NBFCs
NBFCs are typically well suited for financing businesses involving low ticket sizes,
intensive customer servicing with repeated interactions, monitoring and hence high
levels of staffing, and the need for flexibility in appraisal norms and loan repayment
terms. Banks prefer large-ticket loans as they lack the low-cost large feet on the
street. Also, banks prefer traditional methods of loan appraisal (requiring stringent
documentation) and repayment terms.
The untapped addressable finance demand in the micro enterprises segment
presents a huge opportunity for NBFCs, especially for those such as SCUF who have
the necessary workforce and infrastructure to service this demand profitably
17 January 2017
10

Shriram City Union Finance
Two-wheeler – A segment difficult to assess
Largest two-wheeler lender in India by volumes
SCUF is the largest two-
wheeler financier by
volume in the country
~30% of two-wheeler purchases are on finance. NBFCs account for ~80% of the two-
wheeler financing market.
SCUF is India’s largest two-wheeler financier by volumes, disbursing ~75,000 loans per
month via its large network of 6,000 dealers.
2W loans are offered as entry products in markets where Shriram Chits is not present.
This is done to establish a foothold there and understand the credit behavior of the
target customer segment.
A mass market product; helps in understanding credit behavior
SCUF enters a new
geography with the two-
wheeler loan product, as
two-wheelers are mass
market products
When expanding into newer geographies, SCUF adopts a cautious approach and
starts off with two-wheeler loans. It then gradually moves to introduce other
products such as gold and SME loans. The advantage of beginning with two-wheeler
loans is that it is a mass-market product and helps to get local area knowledge and
credit culture at a faster pace. SCUF enters into agreements with local dealers
instead of OEMs for setting up loan desks in their showrooms and targets the non-
bureau listed self-employed segment.
Exhibit 13: Two-wheeler financing - Snapshot
Particulars
Geographies
Number of branches
Dealer network
Dealer commissions
Yield
Tenure
LTV
Volumes
Description
South & West (80%). North picking up
90-95% of branches do 2W lending
6,000 dealers across the country
1.5-2%
22-24%
18-24 months
75%
~75,000 two-wheelers financed per month
Source: MOSL, Company
Improving levels of two-wheeler financing penetration
Finance penetration for
two-wheelers is much lower
today than it was in
2008/09
Finance penetration of two-wheelers plunged sharply from levels of 60% before
2009 to around 23% in FY11. However, penetration has started increasing again and
currently stands at ~30%. We expect this trend to continue over the medium term
as the market is expected to see aggressive action by both existing players as well as
new entrants.
Gaining market share to become one of the largest players in India
SCUFs 2W financing book size is INR39b and is amongst the largest players in the
NBFC space. The size of the book is comparable to HDFC Bank (INR58b), Bajaj
Finance (INR45b) and IndusInd Bank (INR31b). The company’s dominant position is
underpinned by rich experience of more than a decade of presence and a deeply
penetrated network even outside the southern markets. This portfolio has
witnessed a sustained strong growth of +15% over the past couple of years
notwithstanding modest volume growth registered by the 2W industry. The
company is benefitting from the trend of increasing credit purchases.
17 January 2017
11

Shriram City Union Finance
SCUF is also making efforts in encouraging customers to opt for the financing option
and save the cash for business needs and emergencies. Thus, it is playing a pivotal
role in expanding the 2W financing market. SCUF has enjoyed a decent share in the
2W financing market. We believe that SCUF would continue performing well in this
segment on the back of its strong presence in rural and semi-urban areas, targeting
the self-employed and under-banked segments.
Exhibit 14: Two-wheeler AUM – Pickup in FY18 – helped by increasing finance penetration
2-wheeler loans (INR b)
53
28
14
13
FY12
21
FY13
26
FY14
30
FY15
17
35
FY16
12
39
FY17E
18
47
FY18E
18
55
FY19E
Growth (%)
Source: MOSL, Company
17 January 2017
12

Shriram City Union Finance
Gold loan book stable; Personal loans to drive growth
Formal gold loan players will continue gaining market share
SCUF cut back significantly
on gold loans in FY14 on the
back of correction in gold
prices and stringent norms
laid out by the RBI
Gold loan AUM declined sharply on the back of correction in gold prices and tightening
of lending norms by the RBI. With gold prices having stabilized, AUM growth picked up
in FY15/16. However, the company looks to grow this book in a calibrated way.
Post demonetization, we expect formal gold financiers to gain market share from
informal moneylenders which account for an estimated 75% of the total market.
Over the past few quarters, SCUF has focused on growing its cross-sell personal loans
book. This book, growing at 35%+, enjoys much higher yields than other segments.
Gold loan portfolio has stabilized
SCUF’s growth slowed down during FY13-16 with AUM registering CAGR of just
7.3%. The slowdown in growth was due to: a) run down of the gold loan portfolio
following tightening of norms by the RBI, and b) political tensions in the key state of
Andhra Pradesh.
Exhibit 15: AUM CAGR of 7% over FY13-16 v/s 36% over FY09-13, dragged by gold loans
AUM (INR b)
68
53
37
13
18
(7)
46
FY09
52
FY10
80
FY11
134
FY12
158
FY13
147
FY14
167
FY15
196
FY16
14
17
YoY Gr. (%)
Source: Company, MOSL
Share of gold loans declined
from 30% in FY13 to 17% in
FY14
Loan against gold was the fastest growing segment for the company and constituted
36% of AUM in FY12. However, SCUF decided to run down its gold loan book after a)
RBI tightened norms for lending against gold b) gold price volatility in international
markets which resulted in lower yields and increased credit costs and c) political
situation in state of Andhra Pradesh. As a result, gold AUM declined ~50% from
INR48.3b in FY12 to INR25b in FY14. During this period, SCUF focused on recoveries
and managed to keep its asset quality under check. With a GNPL ratio of 2.4%, this
segment enjoys the best asset quality among all segments of the company.
17 January 2017
13

Shriram City Union Finance
Exhibit 16: Gold loan book declined sharply in FY14
Gold Loans (INR b)
48
47
~50% decline
30
33
17
Exhibit 17: Leading to decline in share of gold loans
36
Share of Gold loan in total AUM (%)
30
18
25
17
FY12
FY13
FY14
FY15
FY16
FY12
FY13
FY14
FY15
FY16
Source: Company, MOSL
Source: Company, MOSL
Demonetization – Temporary blip on growth; Asset quality to be stable
In this segment, 100% of dealings (disbursements as well as collections) are done in
cash. This segment would be the worst hit in terms of growth as the company can
only disburse loans up to the extent of collections. Collection efficiency was 85%+ in
November. We expect AUM to remain largely stable in 2HFY17, but should pick up
in FY18 with improved currency in circulation. However, we do not foresee any asset
quality pain due to the SCUF’s prudent underwriting practices (66% LTV at
origination).
Exhibit 18: AUM growth expected to pick up
AUM (INR b) 21
11
(2)
(10)
Growth (%)
15
15
(47)
48
FY12
47
FY13
25
FY14
30
FY15
33
FY16
30
FY17E
34
FY18E
40
FY19E
Source: MOSL, Company
Focus on personal loan cross-sell to improve growth and margins
SCUF also has auto and personal loan products. While auto financing is not a focus
of the company anymore, personal loans have been a strong focus in the past few
quarters and now account for 6-7% of the total AUM. This book has been growing
35%+ YoY. This business, which is unsecured, is primarily cross-sell to existing
customers, thus reducing risk to a certain extent. While delinquencies are slightly
higher than those in other segments, it is compensated by higher yields. We expect
the share of personal loans to continue to rise which will help improve margins.
17 January 2017
14

Shriram City Union Finance
After growing at a sluggish 8% AUM CAGR over FY13-16, we believe SCUF is back on
the growth track driven by MSME, personal and two-wheeler loans. We expect 19%
AUM CAGR over FY16-19E.
Exhibit 19: AUM growth expected to pick up
68
53
18
(7)
14
17
22
22
AUM (INR b)
Growth (%)
13
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
Source: MOSL, Company
17 January 2017
15

Shriram City Union Finance
SWOT analysis
Unique, presence in high yield, high growth business
segments and superior sustainable returns
Customers are largely drawn from Shriram Group’s
chit fund subscribers leading to lower credit risk
Strong presence in semi-urban, and rural areas of
Southern and Western India
Strength
Operates in high-risk segments. Asset quality in these
segments is cyclical
Dependence on wholesale funding is high. The
company is trying to reduce this by exploring the
NCD route
Gold loan business runs on cash
Weaknesses
Operates in underpenetrated business segments
with huge growth potential
Currently only 45-50% of the total branches offer the
entire product suite. Expansion of product offering at
such locations would result in higher growth
Yet to explore the whole set of customers of Shriram
Chits
Opportunities
Threats
SCUF operates in small-ticket retail finance. High
yield in this segment could attract stiff competition
Significant concentration in southern region,
especially Tamil Nadu
SFBs, like Equitas, have access to lower cost of funds
Changes in regulatory guidelines could impact the
business parameters
17 January 2017
16

Shriram City Union Finance
Consolidation over; growth revival to drive earnings
Expect AUM CAGR of 19% over FY16-19; RoE to improve to 17% by FY19
As discussed, AUM CAGR is expected to ~19% over FY16-19E led by MSME and
personal loans. Negative impact of interest reversals will be offset by declining
borrowing cost, thus keeping margins largely stable.
SUCF maintained RoE of >20% over the past decade however, regulatory challenges in
gold loan product, transition to 90dpd and additional capital infusion impacted ROE
over last two years. We expect improvement in growth rates to drive operating
leverage and leverage on equity driving overall growth lower.
Small business loans set to drive earnings growth
MSME financing, which was
a significant growth driver
for SCUF, slowed down over
FY13-16 due to sluggish
rural economy and political
unrest in AP
Small business loans registered a CAGR of 71% between FY08-13, but slowed down
considerably to grow at an average of just 18% over the subsequent two years, due
to a general slowdown in the economy, run down in the gold loan book, and political
uncertainty in the key state of Andhra Pradesh due to the Telangana movement.
Exhibit 20: SME book driving AUM growth
SME Book Growth (%)
75
68
63
AUM Book Growth (%)
53
13
6
25
18
18
(7)
18
14
FY15
19
17
FY10
FY11
FY12
FY13
FY14
FY16
Source: MOSL, Company
With continued focus on
MSME financing, share of
this segment should reach
57% over next three years
In our view, the company’s strategy to focus on business loans and stability on gold
would enable small business loans to drive earnings growth for the company. Strong
latent demand in the segment (where nearly over 40% of credit demand from the
MSME segment is unmet) and banks’ unwillingness to lend to this segment should
support the company’s growth. We estimate AUM to grow at a CAGR of 19% over
FY16-19E, driven by growth in MSME loans and personal loans.
Healthy capitalization to support growth without dilution
With Tier I capital of 23%,
SCUF is much better
capitalized than all its peers
SCUF is well capitalized with CAR of 26%; we believe the current capital level is quite
adequate and should support the company’s growth targets over the medium term
without further dilution. SCUF’s Tier I capital ratio increased in FY15 on the back of
equity infusion of INR7.9bn from Piramal Enterprises.
17 January 2017
17

Shriram City Union Finance
Exhibit 21: Healthy capitalization levels to support dilution-
free growth
Total CAR (%)
26.9
20.5
17.4
19.0
26.1
28.8
26.1
5.8
5.7
Exhibit 22: Low leverage due to recent capital infusion
Leverage (x)
7.0
6.8
5.2
4.0
4.2
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: Company, MOSL
Source: Company, MOSL
Additionally, current leverage (assets/equity) is below the peer average of 6-7x. This
provides additional comfort as the company has room to increase leverage to
support loan growth.
Exhibit 23: Well capitalized among peer group
Tier I Capital (%)
13.6
15.0
15.3
23.4
6.3
6.0
6.2
4.2
Exhibit 24: Low leverage provides ample headroom to grow
7.2
13.2
MMFS
CIFC
BAF
SHTF
SCUF
SHTF
MMFS
BAF
CIFC
SCUF
Source: MOSL, Company
Source: MOSL, Company
Declining funding costs and stable lending rates to push NII
SCUF relies significantly on
bank borrowings (50% of
total borrowings)
SCUF enjoys a well-diversified funding base. It also has access to retail deposits as it
is registered as a deposit-taking NBFC with the RBI. Although bulk of the borrowing
comes from banks, the concentration is mitigated as SCUF borrows from a large
number of foreign and domestic banks. Declining wholesale interest rates and a
reduction in base rates/MCLR by banks would lead to a fall in cost of funds for SCUF.
We have built in cost of fund reduction of ~70bp from 10.3% in FY16 to 9.6% in
FY19. We believe there could be further downside to cost of funds.
Exhibit 26: Bulk of borrowing is from banks
Retail Borrowing
55
54
12
60
10
54
Bank Borrowing
9
58
7
54
Market Borrowing
6
53
10
59
Fixed rate (%)
Exhibit 25: Nearly half of borrowing at floating rate
Floating rate (%)
48
48
49
52
50
53
46
53
53
58
52
52
51
48
50
48
54
47
47
42
45
46
29
FY11
36
FY12
34
FY13
40
FY14
41
FY15
31
FY16
Source: Company, MOSL
Source: Company, MOSL
17 January 2017
18

Shriram City Union Finance
SCUF lends primarily on a fixed rate, while bulk of its borrowings are from banks
(variable rate). As a result, its assets re-price slower than its liabilities. Hence, in a
declining interest rate scenario, margins should benefit as SCUF does not intend to
reduce lending rates anytime soon. In addition, higher mix of personal loans will
help improve overall yields. However, there will be a negative impact of interest
reversals due to NPA migration to 90dpd in FY17 and FY18. Hence, we expect NIMs
to remain largely stable at ~13% over the medium term.
Exhibit 27: Stable yields with falling CoF…
Yield on loans (%)
19.0
12.0
20.9
12.5
21.2
21.9
20.7
Cost of funds (%)
20.6
20.3
20.3
Exhibit 28: …leads to stable margins
10.9
11.0
10.3
10.0
9.6
9.6
10.4
FY12
Source: Company, MOSL
11.2
FY13
11.8
FY14
13.3
FY15
13.2
FY16
13.4
13.4
13.3
FY17E FY18E FY19E
Source: Company, MOSL
Cost to income ratio to improve as growth returns and margins expand
Operating expense ratio
deteriorated sharply in past
three years due to transfer
of employees from the Chit
fund and investments in
network development
SCUF’s cost to income increased over the last 8 quarters due to the following
factors: a) slowdown in AUM growth, led by the rebalancing of its gold loan portfolio
and the slowdown in SME loan off take which resulted in resource underutilization;
b) SCUF transferred ~7000 employees from its chits subsidiary; these employees
were primarily involved in developing the SME loan business among chit customers;
and c) investments in resource and network. The cost/avg. AUM ratio increased
significantly from 3.7% in 1QFY13 to 6.1% in 4QFY16, while the cost/income ratio
touched a multi-quarter high of 46%. This is likely to decline in the coming quarters
as AUM growth accelerates largely driven by improving productivity of existing
resources and branches.
Exhibit 30: AUM growth to drive decline in cost ratios
C/I ratio (%)
4.4
4.3
4.7
Cost/Avg AUM (%)
5.8
5.7
5.7
5.6
Exhibit 29: C/I ratio peaked in FY16, starting to improve now
C/I ratio (%)
Cost/Avg AUM (%)
6.1
6.1 5.8
5.5 5.7 5.6
5.5 5.4
5.4 5.6
4.9 5.1
5.4
3.7
4.0
31.2
38.1
37.8
37.9
39.1
41.7
43.5
42.1
41.5
40.0
Source: Company, MOSL
Source: Company, MOSL
17 January 2017
19

Shriram City Union Finance
Exhibit 31: SCUF’s PPoP to average assets has remained largely stable
FY13
8.5
6.9
6.4
6.8
7.6
FY14
FY15
FY16
7.7
7.5
7.9
7.7
3.8
4.4
4.6
5.3
7.1
6.8
6.1
6.9
6.4
6.1
6.3
SHTF
MMFS
BAF
CIFC
SCUF
Source: MOSL, Company
Asset quality expected to remain stable; barring transition to 90dpd
SCUF recognizes NPL at
150dpd. It has robust PCR
of 73%
Although SCUF targets self-employed customers – a segment where majority of
borrowers does not possess credit bureau verification data – it has maintained
GNPA levels below 4.0% over the past decade. However under the new NPL
migration norms, reported NPL will remain elevated. In FY16, SCUF migrated to
150dpd due to which NPLs spiked to 5.15%. While the reported NPL numbers will
continue to rise due to migration, we do not foresee any increased risk to net credit
losses. Further, the company enjoys a healthy coverage ratio of over 70% which
would help it cushion the impact of rising GNPLs.
Exhibit 32: Increase in GNPL due to migration to 90dpd and impact of demonetization
GNPA (%)
NNPA (%)
7.5
5.2
2.3
0.7
FY10
2.2
0.8
FY13
2.7
0.6
FY14
3.1
0.7
FY15
1.6
3.2
4.2
8.7
8.8
4.2
1.9
0.4
FY11
1.6
0.4
FY12
FY16
FY17E
FY18E
FY19E
Source: MOSL, Company
Credit cost to remain elevated under new regulatory regime
Credit cost to moderate as
SCUF utilizes its strong
provision buffer
IN 4QFY16, SCUF migrated to 150dpd NPL reorganization norms as mandated by RBI
under the new regulatory regime. This move led to a 160bp QoQ increase in NPLs to
5.15%; in our view, credit cost will remain elevated as the company has to migrate
to 90dpd NPL reporting (this will push reported NPLs at higher levels) over the next
two years. There will also be some impact of demonetization on the reported asset
quality.
17 January 2017
20

Shriram City Union Finance
Exhibit 33: Credit cost (% of AUM) should moderate going forward
Credit Cost (%)
2.4
1.7
1.9
1.5
1.5
2.4
2.3
2.6
3.0
2.9
2.7
2.7
Source: MOSL, Company
Exhibit 34: Healthy provision coverage ratio maintained
PCR (%)
69.1
41.0
49.3
77.0
75.6
63.3
77.6
78.3
70.0
36.6
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: MOSL, Company
When compared to its peers (SHTF, MMFS and CIFC), SCUF has maintained robust
asset quality and a higher coverage ratio.
Exhibit 35: SCUF’s asset quality better than peers…
FY14
8.3
6.2
3.9
3.8
4.6
1.9
2.4
6.1
3.5
2.7
3.1
5.2
FY15
FY16
SHTF
MMFS
CIFC
SCUF
Source: MOSL, Company; Note: SHTF and SCUF recognize NPA on 150dpd, CIFC and MMFS on 120dpd
basis
17 January 2017
21

Shriram City Union Finance
Exhibit 36: …resulting in higher coverage ratio (%)
FY14
79
80
FY15
FY16
78
59
61
62
63
35
40
78
70
70
SHTF
MMFS
CIFC
SCUF
Source: MOSL, Company
RoE’s suppressed; Operating leverage and equity leverage to drive
improvement
SCUF has maintained healthy ROE (over 20%) over the past decade. However, its
ROE declined sharply to 12.3% in FY16 due to capital infusion of INR7.9b (by Piramal
Enterprises) and significant higher credit cost. Given the improving growth outlook
and lower credit costs, we expect earnings to grow at a CAGR of 27% during FY16-19
and ROE to reach 18% by FY19.
Exhibit 37: RoE to improve in forecast period
3.8
RoE (%)
3.7
3.4
3.5
3.5
3.0
RoA (%)
3.3
3.6
3.7
Exhibit 38: Current RoE suppressed due to lower leverage
21.8
23.2
22.5
Leverage (x)
20.2
15.9
12.3
13.9
15.3
RoE (%)
16.8
5.7
FY11
FY12
FY13
FY14
FY15
FY16 FY17E FY18E FY19E
Source: MOSL, Company
FY11
7.0
FY12
6.8
FY13
5.2
FY14
4.0
FY15
4.2
4.2
4.4
4.6
FY16 FY17E FY18E FY19E
Source: MOSL, Company
17 January 2017
22

Shriram City Union Finance
Bull & Bear case
Bull Case
In our bull case, we assume an AUM CAGR of 23% (vs. base case of 19%). We
believe that if circulation of currency is better than expected, there is significant
upside to AUM growth.
Margins will expand to 13.9% by FY19 driven by a sharp decline in cost of funds,
lower impact of interest reversals and strong growth in high-yielding personal
loans book.
We expect improved cost control, with cost-to-income ratio declining more than
600bp over FY16-19 to 36.8% (v/s 40% in base case)
Asset quality would show some improvement with GNPA of 7.5% by FY19 (v/s
8.8% in base case) on 90dpd basis.
This results in a PAT CAGR of +39% (vs. 25% in base case) over FY16-19 with
RoA/RoE in FY19 equal to 4.7%/22.2%
Based on the above assumptions, our bull case target multiple is 3.0x FY19 BV,
implying an upside of 71%.
Bear Case
In our bear case, we assume an AUM CAGR of 13% (vs. base case of 19%).
Sustained sluggishness in the 2W segment and slowdown in the SME segment
could result in moderation in AUM gowth.
We expect margins to remain stable at ~13%.
Sluggish growth coupled with increase in operating expenses will result in cost-
to-income ratio increasing to 46.4% by FY19 (v/s 40% in base case)
Asset quality would deteriorate further with GNPA of 9.2% by FY19 (v/s 8.8% in
base case) on 90dpd basis.
This results in a sluggish PAT CAGR of 10% (vs. 25% in base case) over FY16-19
with RoA/RoE in FY19 equal to 2.8%/12.6%
Based on the above assumptions, our bear case target multiple is 1.5x FY19 BV,
implying a downside of 29%.
Exhibit 39: Scenario Analysis – Bull Case
Bull Case
NII
Opex
Provisions
PBT
PAT
NIM
RoA
RoE
EPS
BV
Target multiple
Target price
Upside/downside
FY17E
27,685
11,909
7,203
9,438
6,201
13.3
3.1
13.0
94
759
3.0
3,192
73%
FY18E
34,335
14,182
7,314
13,767
9,045
13.6
3.8
16.8
137
875
FY19E
44,720
16,868
7,359
21,592
14,186
13.9
4.7
22.2
215
1,064
Source: Company, MOSL
17 January 2017
23

Shriram City Union Finance
Exhibit 40: Scenario Analysis – Bear Case
Bear Case
NII
Opex
Provisions
PBT
PAT
NIM
RoA
RoE
EPS
BV
Target multiple
Target price
Upside/downside
FY17E
26,150
12,063
7,419
7,513
4,936
13.1
2.5
10.5
75
740
1.5
1,331
-28%
FY18E
28,909
14,018
6,936
8,807
5,786
13.0
2.7
11.3
88
806
FY19E
33,794
16,135
7,856
10,745
7,059
13.1
2.8
12.6
107
887
Source: Company, MOSL
17 January 2017
24

Shriram City Union Finance
Valuations and view
Strong earnings growth and ROE improvement despite headwinds
SCUF is a niche play in the retail NBFC space with the focus on MSME lending. Its
business model offers high growth potential with strong profitability and low
competition.
While SCUF has maintained GNPL (180dpd) <4.0% over the cycle, we expect it to rise
to 8.8% by FY19 on account of migration to 90dpd and some impact of
demonetization. Yet, loan loss provisioning will decline as SCUF has strong PCR of 70%,
more than peers.
We believe this is a 3.5-4.0%+ RoA business on a run-rate basis. After all the impact of
NPA migration is over, we expect RoA/RoE of 3.7%/16.8% in FY19. We believe a
company growing at 20%+ YoY with a run-rate RoE of 16-18% deserves a better
multiple. Buy with target price of 2,500 (2.5x FY19E P/B)
SCUF is a niche play in the retail NBFC space with MSME and gold financing key
focus areas. Its business model offers high growth potential with strong profitability
and low competition. The target customer segment and the small and mid-market
remains under penetrated by the formal banking system, thus offers huge potential.
Moreover with strong credit appraisal skills developed over the years, the company
is well placed to benefit from the huge untapped potential in the SME space. In our
view, SCUF is an attractive play on the under-penetrated rural and semi-urban
MSME markets of India. It has strong competitive advantage and operates in a niche
segment, which should offer it a good growth and return profile.
After delivering a 44% AUM CAGR from FY06-13, the company went into a
consolidation mode, given the weak macro environment and the re-alignment of the
gold loan portfolio. As a result, the AUM grew at a meager 7.3% over FY13-16. With
the portfolio aligned, scaling up of business in new geographies and a healthy
capitalization of 23% (Tier I), we expect SCUF to move back into growth mode. We
expect AUM/earnings growth of 19%/25% over the next three years.
We value the company based on its residual income model. We have assumed
Rf=7.0%, CoE=13.5% and terminal growth rate = 5%. We initiate coverage with a Buy
rating, valuing the stock at INR2,500 implying 2.5x FY19 P/B.
Exhibit 41:
SCUF P/B chart
3.5
2.7
2.0
1.9
1.1
0.3
0.0
Exhibit 42:
BAF P/B chart
10 Yrs Avg(x)
8.0
6.0
P/B (x)
10 Yrs Avg(x)
P/B (x)
2.2
4.0
2.0
1.8
4.7
Source: MOSL, Company
Source: MOSL, Company
17 January 2017
25

Shriram City Union Finance
Exhibit 43:
CIFC P/B chart
4.5
3.0
1.7
1.5
0.0
P/B (x)
10 Yrs Avg(x)
3.1
Exhibit 44:
MMFS P/B chart
3.5
2.9
2.3
1.7
1.1
0.5
2.1
2.3
P/B (x)
10 Yrs Avg(x)
Source: MOSL, Company
Source: MOSL, Company
Exhibit 45:
SHTF P/B chart
4.0
3.0
2.0
1.0
0.0
1.8
P/B (x)
10 Yrs Avg(x)
2.1
Source: MOSL, Company
17 January 2017
26

Shriram City Union Finance
Key risks
Stringent credit appraisal is the key
SCUF’s borrowers are primarily self-employed. Their earnings are volatile and closely
linked to the local economy. Accurate credit appraisals and managing recoveries are
the key to maintaining asset quality.
Competition from other NBFCs and SFBs in small enterprise loans
Given attractive yields in the small enterprise loans segment, other NBFCs,
especially SFBs, could get aggressive in this segment. SFBs will have access to lower
cost of funds, which could potentially lead to price competition. This would have a
big impact on SCUF’s margins and thereby, return ratios. Further, in order to
maintain market share, the focus toward stringent credit appraisals might get
diverted, leading to elevated levels of NPAs.
Increased competition from NBFCs and banks in 2W loans space
The 2W loan space, where only 30% of vehicles are purchased on credit, presents
major business opportunities for banks as well as captive financing arms of 2W
manufacturers. Aggressive business moves by such companies could hurt SCUF’s
expansion as it uses 2W lending as an entry avenue in newer geographies. Thus,
slower growth in the 2W franchise would hurt geographical expansion plans of the
company.
Sustained slowdown in demand due to demonetization
The demand for credit, especially in the MSME segment, has been subdued since
demonetization as underlying business activity has been impacted. While we believe
that operations should return to pre-demonetization levels in 1-2 quarters, a
sustained slowdown in underlying business activity would lead to sluggish loan book
growth. In addition, slowdown in on-the-ground business activity could lead to rise
in NPLs as collection efficiency declines.
17 January 2017
27

Shriram City Union Finance
Company Background
Shriram City Union Finance (SCUF) is a deposit-taking NBFC focusing on retail
lending. It offers loans to small and medium business enterprises, two-wheeler
loans, loans against gold and home loans via its subsidiary Shriram Housing
Finance in rural and semi-urban areas of India.
Established in 1986 as Shriram Hire Purchase Finance, it is a part of three-
decade old Shriram Group, which has interests in commercial vehicle loans,
retail finance, chit funds, insurance, etc.
Prior to 2002, SCUF was engaged in offering loans for used commercial vehicles
primarily to small road transport operators. However, Shriram Group
consolidated its commercial vehicle financing business under its group company
(Shriram Transport Finance Ltd). Thus, SCUF exited the segment and focused on
other product offerings, including loans to small and medium business
enterprises, two-wheeler loans and loan against gold.
SCUF grew its AUM at a CAGR of 33% over the past decade to INR203b by
leveraging the existing customer relationship of the Shriram Chit Fund. SCL and
its operating entities have an overall customer base in excess of 10.2m, more
than 42,000 employees across 2,400 offices, and net profit of INR22b with
assets under management (AUM) in excess of INR760b.
SCUF is backed by a strong support of private equity investors. It raised INR1.3b
in FY09 via preferential allotment to private equity at a price of INR400 per
share from investors, including PE investors such as TPG Capital. Further, in
2014, Piramal Enterprises picked up a 10% stake at INR1,200 per share.
Exhibit 46: SCUF’s business mix
Product Offering
MSME Finance
Small Enterprise
Finance
Loans to self-
employed customers
for various business
needs
Two
Wheeler
Purchase of
2-wheeler
Auto Loans
Purchase of
new and pre-
owned
passenger
and
commercial
vehicles
9%
Dec-2005
30
22%-24%
150,000
60%
Retail Finance
Personal
Loans
Personal
loans to its
existing and
old
customers
Loan
against
Gold
Loan
against gold
as a
collateral
Home Loans
Loans for
construction/purch
ase of house/flat
Product Profile
% of Loan book
Year of commencement
Average Tenor (months)
Average Yield (%)
Avg. Ticket Size (INR)
LTV (%)
53%
Dec-2005
36
24%-27%
500,000
NA
18%
Dec-2002
24
22%-24%
35,000
75%
3%
Jan-2006
30
24%-27%
75,000
NA
17%
Oct-2006
4
16%-18%
40,000
66%
Dec-2011
15 years
15%
1,000,000
60%
Source: MOSL, Company
17 January 2017
28

Shriram City Union Finance
Exhibit 47: Important timeline
Source: MOSL, Company
Board of Directors
SCUF’s senior management comprises of professionals with significant experience
and association with the group for significant amount of time. The team is led Mr.
Duruvasan Ramachandra, Managing Director & CEO, who has been with the group
nearly since inception.
Exhibit 48: Board of Directors
Name
Designation
Education
Experience in
Prior/Other assignments
Financial services
(Years)
~30
CEO and Executive Director of Shriram Chits
P Ltd
35
Chief Secretary, Govt. of Tamil Nadu
22
37
13
~40
Chief Financial Officer of Sanlam Emerging
Markets
MD of State Bank of Mysore
Head of FIG, TPG Capital
Banking Ombudsman, Chennai
Source: MOSL, Company
Mr. Duruvasan
Managing Director &
Ramachandra
CEO
Mr. Debendranath
Independent Chairman
Sarangi
Mr. Gerrit Lodewyk Van Non-Independent
Heerde
Director
Mr. Pranab Prakash
Independent Director
Pattanayak
Mr. Ranvir Dewan
Non-Independent
Director
Mr. Subramaniam
Independent Director
Krishnamurthy
Commerce Graduate
IAS (1977 Batch), M. Sc ,
MA
B. Com; Honors degree in
Actuarial Science
Master of Arts
B. Com; Chartered
Accountant
B.A; LLB
17 January 2017
29

Shriram City Union Finance
Chit Fund: How it works
A chit fund is a kind of savings scheme practiced in India. A chit fund company is a
company that manages, conducts or supervises a chit scheme—chit fund companies
are regulated by Chit Fund Act, 1982. These schemes are very popular in tier II and
III towns in India and even in rural India, due to under-penetration of banking
services, as they are a way of raising quick money or catering to sudden liquidity
needs or even planned expenditure.
Exhibit 49: Illustration of how a chit fund works
Source: Company, MOSL
The foreman—the company conducting the chitty—brings the members
together and conducts the chitty. The foreman is also responsible for collecting
the money from members, preside over the auctions, and keep subscriber
records. He is compensated by a fixed amount (generally 5% of gross chitty
amount) monthly for the efforts.
The members of the chitty get into an agreement to subscribe a sum of money
by way of periodic installments and each member in turn is entitled to the prize
amount. As per the general pattern,
monthly subscription amount x duration
(in months) = Gross Prize Amount.
For example, if we consider a chit value of INR 100,000/- with 50 members in
the group, then each member has to contribute INR2,000/month, whereby
30
17 January 2017

Shriram City Union Finance
(50X2,000) INR100,000 is collected by the group. The duration also equals the
number of subscribers as there must be not more or less subscribers to receive
price money each month.
Chit fund members assemble on a fixed day every month with their
contributions. The maximum prize money on an auction may be limited to say
70% of the gross sum assured, which is INR 70,000 in the above example. If
there is more than one person willing to take this minimum sum, then a reverse
auction is conducted, in which subscribers bid for sum lower than INR100,000,
in our example.
The auction is conducted in which the members participate and the member
who offers maximum discount is declared as the prized subscriber.
The member who gets the prize foregoes the discount he offered for e.g. if
winning bid was 45%, which means a person foregoes INR45,000 and the
balance INR55,000 is paid to the winner as prize money. Out of 45% discount 5%
goes to the foreman towards commission for conducting the chit and balance of
the discount amount is distributed equally amongst all members of the group.
So 40% is distributed to all the members by which next month they have to
contribute (INR2000-800) = INR1200 and INR800 is declared a dividend for that
month.
17 January 2017
31

Shriram City Union Finance
Shriram Housing Finance: Nascent business
Great potential ahead
Housing finance business is 8% of SCUF’s AUM
SCUF floated Shriram Housing Finance (SHF) as its subsidiary in 2011. SCUF holds
77.25% in the entity with PE investor, Valiant Partners, holding the rest 22.75%. SHF
is engaged in providing finance for purchase, acquisition and repair of housing
property and primarily targets self-employed and informal salary employees in the
Tier-II and Tier-III cities. SHF currently operates out of 79 branches spread across 17
states in India and employs ~600 people.
Exhibit 50: SHF’s product profile
Avg. Loan Amt. – Individual loans (INR m)
Avg. Balance Tenure (months)
Avg. LTV (%)
Portfolio mix (%)
GNPA (%)
~1.1
175
54
Retail home loan (85%), LAP (10-12%), Builder loans (3-4%)
3.5
Source: Company, MOSL
SHF had an AUM of INR18b as of 2QFY17 and recorded CAGR of 100% over FY14-16.
It enjoys yields of ~15% and NIMs of 10% as it focuses on self-employed people, and
until FY15, it was utilizing its own capital for disbursement and thus cost of fund was
zero. Gross NPA currently stands at 3.5%, but the company targets to bring it to
down to ~1.5% over the medium term. Prior to demonetization, the company
targeted to grow the loan book to INR50b by FY18. However, we believe it should
now be able to reach INR35-40b by FY18.
Exhibit 51:
Disbursement growth remains strong
Disbursement (INR m)
Exhibit 52:
AUM has grown ~4x in two years
AUM (INR b)
13
15
18
3
4
5
6
7
9
10
11
Source: MOSL, Company
Source: MOSL, Company
Shriram Housing will continue focusing on the self-employed/affordable housing
category (currently c.90% of loan book) in Tier II/III towns. We ignore SHF in our
valuation as the business is still in the nascent stage and does not contribute much
to SCUF’s earnings.
17 January 2017
32

Shriram City Union Finance
Financials and valuations
Income Statement
Y/E March
Financing Income
Financing charges
Net Financing income
Change (%)
Income from securitisation
Net Income (Incl Secur)
Change (%)
Fee & Other Income
Net Income
Change (%)
Employee Cost
Other Operating Exp.
Operating Income
Change (%)
Total Provisions
% to operating income
PBT
Tax
Tax Rate (%)
PAT
Change (%)
Proposed Dividend
Balance Sheet
Y/E March
Capital
Reserves & Surplus
Net Worth
Net Worth
Borrowings
Change (%)
Other Liabilities & Prov.
Total Liabilities
Investments
Change (%)
Loans
Change (%)
Net Fixed Assets
Net Current Assets
Total Assets
E: MOSL Estimates
2012
17,824
9,286
8,538
24.3
2,624
11,162
45.1
76
11,238
46.1
924
3,330
6,985
46.6
1,743
25.0
5,242
1,816
34.7
3,425
42.4
335
2013
27,012
14,105
12,907
51.2
3,460
16,367
46.6
75
16,442
46.3
2,239
3,987
10,215
46.2
3,559
34.8
6,657
2,160
32.5
4,496
31.3
464
2014
29,312
13,507
15,805
22.4
2,207
18,012
10.1
487
18,500
12.5
2,708
4,531
11,261
10.2
3,462
30.7
7,799
2,587
33.2
5,211
15.9
611
2015
33,104
13,432
19,672
24.5
1,243
20,915
16.1
519
21,434
15.9
4,116
4,820
12,499
11.0
4,088
32.7
8,411
2,830
33.6
5,581
7.1
1,028
2016
37,065
13,834
23,231
18.1
658
23,889
14.2
250
24,139
12.6
5,132
5,362
13,645
9.2
5,577
40.9
8,068
2,771
34.3
5,298
-5.1
989
2017E
42,579
15,182
27,397
17.9
508
27,905
16.8
350
28,255
17.1
5,748
6,160
16,347
19.8
6,240
38.2
10,106
3,467
34.3
6,640
25.3
1,055
2018E
49,178
16,969
32,209
17.6
598
32,807
17.6
300
33,107
17.2
6,610
7,114
19,382
18.6
6,857
35.4
12,525
4,296
34.3
8,229
23.9
1,187
(INR Million)
2019E
59,795
20,655
39,140
21.5
728
39,868
21.5
300
40,168
21.3
7,734
8,327
24,107
24.4
8,351
34.6
15,756
5,404
34.3
10,352
25.8
1,450
(INR Million)
2019E
659
65,243
65,903
65,923
236,347
21.8
0
302,270
10,546
10.0
318,892
21.9
641
-27,809
302,270
2012
524
15,982
16,506
17,350
97,914
71.5
0
115,264
178
223.0
110,900
58.0
525
3,660
115,264
2013
554
21,537
22,092
22,528
127,287
30.0
0
149,815
730
309.9
137,795
24.3
884
10,407
149,815
2014
593
28,390
28,983
29,017
120,491
-5.3
0
149,508
6,276
759.5
129,835
-5.8
1,014
12,384
149,508
2015
659
40,352
41,011
41,036
124,017
2.9
0
165,054
9,817
56.4
160,275
23.4
823
-5,861
165,054
2016
659
44,457
45,116
45,136
144,084
16.2
0
189,220
7,923
-19.3
191,406
19.4
849
-11,309
188,869
2017E
659
49,830
50,489
50,509
159,561
10.7
0
210,071
8,716
10.0
215,214
12.4
879
-14,738
210,071
2018E
659
56,634
57,293
57,313
193,968
21.6
0
251,281
9,587
10.0
261,668
21.6
810
-20,784
251,281
17 January 2017
33

Shriram City Union Finance
Financials and valuations
Ratios
Y/E March
Spreads Analysis (%)
Yield on loans
Cost of funds
Interest Spread
NIMs (incl Securitisation inc) on AUM
2012
19.0
12.0
7.0
10.4
2013
20.9
12.5
8.4
11.2
2014
21.2
10.9
10.3
11.8
2015
21.9
11.0
11.0
13.3
2016
20.7
10.3
10.4
13.2
2017E
20.6
10.0
10.6
13.4
2018E
20.3
9.6
10.7
13.4
2019E
20.3
9.6
10.7
13.3
Profitability Ratios (%)
RoE
RoA
Int. Expended/Int.Earned
Other Inc. (incl. Sec. Inc.) / Net Income
Efficiency Ratios (%)
Op. Exps./Net Income
Empl. Cost/Op. Exps.
Asset-Liability Profile (%)
Loans/Borrowings Ratio
Leverage
Average leverage
Valuations
Book Value (INR)
BV Growth (%)
Price-BV (x)
Adjusted BV (INR)
Price-ABV (x)
EPS (INR)
EPS Growth (%)
Price-Earnings (x)
DPS (INR)
Dividend Yield (%)
E: MOSL Estimates
23.2
3.7
52.1
24.0
22.5
3.4
52.2
21.5
20.2
3.5
46.1
14.6
15.9
3.5
40.6
8.2
12.3
3.0
37.3
3.8
13.9
3.3
35.7
3.0
15.3
3.6
34.5
2.7
16.8
3.7
34.5
2.6
37.8
21.7
37.9
36.0
39.1
37.4
41.7
46.1
43.5
48.9
42.1
48.3
41.5
48.2
40.0
48.2
113.3
7.0
6.4
108.3
6.8
6.9
107.8
5.2
5.9
129.2
4.0
4.5
132.8
4.2
4.1
134.9
4.2
4.2
134.9
4.4
4.3
134.9
4.6
4.5
331.3
35.4
5.6
328.6
5.6
65.4
34.7
28.3
6.4
0.3
406.5
22.7
4.5
399.7
4.6
81.1
24.0
22.8
8.4
0.5
489.5
20.4
3.8
484.9
3.8
87.9
8.3
21.0
10.0
0.5
622.7
27.2
3.0
617.0
3.0
84.7
-3.7
21.8
15.0
0.8
684.6
10.0
2.7
668.9
2.8
80.4
-5.1
23.0
15.0
0.8
766.1
11.9
2.4
729.0
2.5
100.7
25.3
18.4
16.0
0.9
869.3
13.5
2.1
809.8
2.3
124.8
23.9
14.8
18.0
1.0
999.9
15.0
1.8
928.5
2.0
157.0
25.8
11.8
22.0
1.2
17 January 2017
34

REPORT GALLERY
RECENT INITIATING COVERAGE REPORTS

Disclosures
Shriram
and may be distributed by it and/or
This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company (ies) and/sector(s), if any, covered in the report
City Union Finance
its
affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or
inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to
you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment
objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek
professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for
future performance, future returns are not guaranteed and a loss of original capital may occur.
MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some
companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are
seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors
on investments in such business . The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and
interpreting information. Our research professionals are paid on twin parameters of performance & profitability of MOSt.
MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt
generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates
may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment
decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest.
MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies
mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an
advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing
whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent
conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as
opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research
separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.
Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from,
any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free
and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other
sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the data, information and/or opinions provided by that third party either publicly or through a
subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the
document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that
may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the
information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the
implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.
This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for
any necessary explanation of its contents.
Most and it’s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation
for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months.
Most and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report.
Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report
MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this
report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.
Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412
Pending Regulatory inspections against Motilal Oswal Securities Limited:
SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry and
adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have requested to
SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.
List of associate companies of Motilal Oswal Securities Limited -Click
here to access detailed report
NOTES
Analyst Certification
The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or
indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive
compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues
Disclosure of Interest Statement
Analyst ownership of the stock
Served as an officer, director or employee
Shriram City Union Finance
No
No
A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes
Regional Disclosures (outside India)
This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which
would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.
For Hong Kong:
This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures
Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has
an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to
SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities,
products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in
Hong Kong.
For U.S
Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a
registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the
absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.
This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This
document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be
engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by
the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal
Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.
The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore,
may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.
For Singapore
Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a
subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the
Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.
In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:
Varun Kumar
Varun.kumar@motilaloswal.com
Contact : (+65) 68189232
Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931
17 January 2017
Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025
Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com
Motilal Oswal Securities Ltd
36