Company update | Sector: Financials
Shriram City Union Finance
BSE Sensex
28,902
S&P CNX
8,924
CMP: INR1,973
TP: INR2,500 (+27%)
Buy
Early signs of revival
Streamlining of MSME loan sourcing to help optimize cost structure
Stock Info
Bloomberg
Equity Shares (m)
52-Week Range (INR)
1, 6, 12 Rel. Per (%)
M.Cap. (INR b)
M.Cap. (USD b)
Avg Val, INR m
Free float (%)
SCUF IN
65.9
2650 / 1477
-1/-12/11
127.1
1.9
111
66.2
Post demonetization, SCUF was impacted with disbursements growth slowing down to
10% YoY and GNPL rising 45bp to 5.4% (without RBI dispensation). However, the
months of January and February have been good, with collection efficiency
approaching pre-demonetization levels and disbursements picking up well.
The streamlining of sourcing of MSME loans should improve employee productivity,
resulting in low-double-digit opex growth over next two years.
Financial Snapshot (INR b)
Y/E March
2017E 2018E 2019E
NII
28.8
33.9
40.5
PPP
17.4
20.4
24.6
PAT
6.0
8.6
10.8
EPS (INR)
91
131
164
EPS Gr. (%)
14
43
26
BV/Sh. (INR)
757
866 1003
RoA (%)
3.0
3.6
3.8
RoE (%)
12.7
16.1
17.6
Payout (%)
21
17
16
Valuations
P/E (x)
21.1
15.1
12.0
P/BV (x)
2.6
2.3
2.0
Div. Yield (%)
0.8
0.9
1.1
Shareholding pattern (%)
Dec-16 Sep-16 Dec-15
Promoter
DII
FII
Others
33.8
6.2
20.1
39.9
33.8
5.8
17.5
43.0
33.8
2.2
16.5
47.6
Almost out of the ‘De-mon’ blues
Management was upbeat on the improvement in collections over past two months.
Collection efficiency, which declined 10% in November, has almost returned to pre-
demon levels. However, many borrowers still do not have enough money to clear all
overdues. Hence, they may be classified as NPLs, but are actually servicing the loans.
Management does not expect any impact on net credit losses. There was a strong
pick-up in MSME disbursements in February, after three muted months (possibly
due to the lifting of withdrawal restrictions). However, it is yet to be ascertained
whether this is pent-up demand or a structural revival in demand.
Improving sourcing efficiencies to help lower costs
Over past few years, SCUF has worked with McKinsey on streamlining of sourcing of
MSME loans. Management believes that the new process has improved salesforce
productivity from 5 to 7 files per employee per month. The company is well-staffed
to support 1-2 years of strong growth and would not need to add to its workforce.
Management reiterated its guidance of 10-12% opex growth over FY17-19.
No meaningful threat from accelerating digitization
Management believes that the SME sector formalization would not be indicative of
intensified competition from banks, considering i) PSU banks may have the reach,
but lack the risk appetite or bandwidth for efficient risk management of such small-
ticket clients, (ii) private banks, barring a few, are constrained by size and
distribution reach and (iii) difficulties in collection – banks are not habituated to
going out on the field and collecting money from individual customers. To support
this argument, management cited that, after increasing in November/December, the
share of non-cash collections declined in January, indicating that customers have
gone back to using cash for business and financial purposes.
High provision coverage provides comfort; Return ratios to improve
SCUF has GNPL ratio of 4.5% (5.4% without RBI dispensation), which we believe will
rise to 9% by FY19 given the transition of NPA recognition from 150dpd to 90dpd.
However, SCUF holds a PCR of 81%, which is higher than most of its NBFC peers
like SHTF, MMFS, CIFC and SUF.
This provides us comfort that the company will not
have to incur severe provisioning charges over the next two years. Strong loan
growth, moderate opex growth and lower provisioning charges will help boost
profitability over the medium term. We expect RoA/RoE to increase from 3%/12.3%
in FY16 to 3.8%/17.6% in FY19.
Note: FII includes depository receipts
Relative to Index
Piran Engineer
(Piran.Engineer@MotilalOswal.com); +91 22 6129 1539
Alpesh Mehta
(Alpesh.Mehta@MotilalOswal.com); +91 22 6129 1526
September 2016
Investors are advised to refer through important disclosures made at the last page of the Research Report.
1
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Shriram City Union Finance
Valuations attractive – Target upside of 25%+
SCUF is a niche play in the retail NBFC space. Its business model offers high-growth
potential, strong profitability and moderate competition. The impact of
demonetization has faded away quicker than expected and we expect normalcy to
resume in FY18. We believe this is a 3.5-4.0%+ RoA business on a run-rate basis and
expect RoA/RoE of 3.8%/17.6% in FY19. In our view, current valuation of 1.9x FY19
BVPS is attractive for a company growing at 20%+ YoY with a run-rate RoE of 16-
18%. The housing finance business (unaccounted for in valuation) will also be a key
value contributor in 3-4 years.
Buy
with TP of 2,500 (2.5x FY19E P/B).
Exhibit 1: Share of loan book
Exhibit 2: Trend in AUM growth
53
MSME
2W
55
18
Gold
Others
68
AUM (INR b)
Growth (%)
12
15
18
(7)
14
17
18
19
20
Source: MOSL, Company
Source: MOSL, Company
Exhibit 3: Operating leverage to kick in
C/I ratio (%)
4.4
4.7
Cost/Avg AUM (%)
5.7
3.7
4.0
4.3
5.8
5.5
5.4
5.3
Exhibit 4: GNPL to increase due to migration to 90dpd
GNPA (%)
76
63
3.1
0.6
FY14
0.7
FY15
1.6
FY16
2.7
3.7
3.8
78
78
NNPA (%)
70
5.2
1.6
0.4
FY12
Source: MOSL, Company
2.2
0.8
FY13
2.7
PCR (%)
8.8
63
7.3
57
9.0
57
31.2 38.1 37.8 37.9 39.1 41.7 43.5 40.1 40.3 39.6
FY17E FY18E FY19E
Source: MOSL, Company
Exhibit 5: Credit costs to normalize due to high PCR
Credit Cost - AUM (%)
2.4
1.5
1.5
2.4
2.3
2.6
3.0
3.7
2.8
2.6
Exhibit 6: Structural improvement in return ratios
RoE (%)
3.8
3.7
3.4
3.5
3.5
3.0
RoA (%)
3.6
3.0
3.8
1.7
1.9
Source: MOSL, Company
Source: MOSL, Company
March 2017
2

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
43,795
15,458
28,337
22.0
497
28,834
20.7
200
29,034
20.3
5,594
6,061
17,379
27.4
8,170
47.0
9,210
3,196
34.7
6,014
13.5
1,055
2018E
50,797
17,464
33,333
17.6
556
33,889
17.5
250
34,139
17.6
6,601
7,156
20,382
17.3
7,283
35.7
13,099
4,493
34.3
8,606
43.1
1,187
(INR Million)
2019E
60,669
20,876
39,793
19.4
664
40,458
19.4
300
40,758
19.4
7,723
8,434
24,600
20.7
8,125
33.0
16,475
5,651
34.3
10,824
25.8
1,450
(INR Million)
2019E
659
65,467
66,126
66,146
240,038
20.4
0
306,184
10,546
10.0
321,703
20.4
851
-26,916
306,184
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
49,204
49,863
49,883
168,208
16.7
0
218,091
8,716
10.0
225,373
17.7
929
-16,926
218,091
2018E
659
56,385
57,044
57,064
199,447
18.6
0
256,511
9,587
10.0
267,263
18.6
930
-21,270
256,511
March 2017
3

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
20.7
9.9
10.8
13.5
2018E
20.3
9.5
10.8
13.4
2019E
20.3
9.5
10.8
13.4
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
12.7
3.0
35.3
2.4
16.1
3.6
34.4
2.4
17.6
3.8
34.4
2.4
37.8
21.7
37.9
36.0
39.1
37.4
41.7
46.1
43.5
48.9
40.1
48.0
40.3
48.0
39.6
47.8
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
134.0
4.4
4.3
134.0
4.5
4.4
134.0
4.6
4.6
331.3
35.4
6.0
328.6
6.0
65.4
34.7
30.2
6.4
0.3
406.5
22.7
4.9
399.7
4.9
81.1
24.0
24.3
8.4
0.4
489.5
20.4
4.0
484.9
4.1
87.9
8.3
22.4
10.0
0.5
622.7
27.2
3.2
617.0
3.2
84.7
-3.7
23.3
15.0
0.8
684.6
10.0
2.9
668.9
2.9
80.4
-5.1
24.6
15.0
0.8
756.6
10.5
2.6
724.6
2.7
91.2
13.5
21.6
16.0
0.8
865.6
14.4
2.3
812.5
2.4
130.5
43.1
15.1
18.0
0.9
1,003.3
15.9
2.0
937.9
2.1
164.2
25.8
12.0
22.0
1.1
March 2017
4

Shriram City Union Finance
NOTES
March 2017
5

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Disclosure of Interest Statement
Shriram City Union Finance
Analyst ownership of the stock
No
Served as an officer, director or employee -
No
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Shriram City Union Finance
NOTES
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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
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Contact : (+65) 68189232
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March 2017
Motilal Oswal Securities Ltd
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