Shriram City Union Finance

India Equity Research | Banking & Financial Services

May 3, 2017
Result Update EmkayYour success is our success

Refer to important disclosures at the end of this report

CMP Target Price

Weak asset quality weighs on Rs 2,182

as of (5/3/2017)
Rs 2,100 ()
12 months

earnings Rating
HOLD ()
Upside
(3.8) %

Change in Estimates
Shriram City Union Finance (SCUF) delivered stable operating performance, however
EPS Chg FY18E/FY19E (%) (13)/(12)
steep increase in credit costs led by transitioning to 120-dpd NPL recognition and higher
write offs weighed heavily on the bottomline Target Price change (%) (5.4)
Target Period (Months) 12
Reported GNPLs increased to 6.7% (on 120-days outstanding basis) from 4.5% (on 150-
Previous Reco HOLD
days outstanding basis) in Q3FY17; Credit costs stood at 7.2% (annualized) as the
Emkay vs Consensus
company wrote off Rs1.4bn worth loans and maintained PCR at ~73%
EPS Estimates
Disbursements grew 21% qoq (+20% yoy) at Rs62.5bn on the back of pickup in the FY18E FY19E
enterprise financing business; Meanwhile the two-wheeler financing business witnessed
Emkay 100.7 133.2
slower growth due to lagged impact of demonetization and regulatory hurdles
Consensus 98.3 119.0
We prune our FY18/19E estimates by an average ~13% to factor in slower growth and Mean Consensus TP (12M) Rs 2,317
higher credit costs for core as well as housing finance business. We maintain our HOLD Stock Details
rating with a revised SOTP-based target price of Rs2,100
Bloomberg Code SCUF IN
Face Value (Rs) 10
Asset quality deteriorates on regulatory transitioning: Gross NPLs increased to 6.7% Shares outstanding (mn) 66
from 4.5% in Q3FY17, as SCUF migrated its NPL recognition to 120-dpd basis. The
52 Week H/L 2,650 / 1,504
Q3FY17 asset quality performance was buoyed by the RBI dispensation for deferment of
M Cap (Rs bn/USD bn) 144 / 2.24
NPL recognition (Rs2bn worth loans fell under dispensation). The company managed to
Daily Avg Volume (nos.) 55,960
recover c.60% of such loans and the rest has been classified as NPLs in Q4FY17. Credit
Daily Avg Turnover (US$ mn) 1.8
costs rose to 7.2% (annualized) as the company wrote off loans worth Rs1.4bn and
maintained provision coverage ratio (PCR) at 73%. As indicated by the management, Shareholding Pattern Mar '17
GNPLs at 90-dpd NPL recognition basis stood 9.7% higher than 9.5% in Q3FY17. Going
Promoters 33.8%
forward, the management has guided for bringing down the provision coverage ratio to
FIIs 21.9%
60% as they migrate to 90-dpd NPL recognition next fiscal.
DIIs 6.0%
Demand in SME revives; two-wheeler remains subdued: AUMs grew 18%% yoy / 3% Public and Others 38.4%
qoq to Rs231bn. Notably, the non-gold segments continue to drive growth as the portfolio
grew 22% yoy (+3% qoq). Disbursements grew strongly post demonetization by 21% qoq Price Performance
(+20% yoy) to Rs62.5bn led by strong demand in the SME business. The demand in the (%) 1M 3M 6M 12M
two-wheeler business was affected due to the lagged impact of demonetization and the Absolute (8) 15 (14) 31
regulatory changes in the auto space. The management has guided for 20%+ AUM growth Rel. to Nifty (8) 8 (19) 12
in FY18.
Relative price chart
Margins contract ~140bps qoq: SCUFs calculated net interest margins contracted 2600 Rs % 50

~140bps qoq to 12.5% mainly due to Rs560m interest income reversal. Going forward too, 2380 38

the management has guided for some pressure on NIMs as they migrate to 90-dpd NPL 2160 26

recognition and in general pressure on yields led by competition.

1940 14

Shriram Housing Finance (SHF) performance: SHF AUMs contracted 4% qoq (+38% 1720 2

yoy) to Rs17.6bn. During the quarter the company sold Rs500m worth NPLs to ARC. As a
1500 -10
result, reported GNPLs fell to 2.6% from 3.7% in Q3FY17. Management has guided for May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17

Shriram City Union Finance (LHS)

50% AUM growth in FY18 in the housing business.
Source: Bloomberg
Financial Snapshot (Standalone)
This report is solely produced by Emkay Global. The
(Rs mn) FY15 FY16 FY17 FY18E FY19E following person(s) are responsible for the
production of the recommendation:
Net income 21,885 24,726 29,001 33,656 40,283
Net profit 5,581 5,298 5,561 6,643 8,782 Umang Shah
EPS (Rs) 84.7 80.4 84.3 100.7 133.2 umang.shah@emkayglobal.com
ABV (Rs) 610.9 652.8 706.9 729.8 825.4 +91 22 66242468
RoA (%) 3.2 2.7 2.5 2.5 2.7 Kushan Parikh
RoE (%) 15.9 12.3 11.8 12.8 15.1 kushan.parikh@emkayglobal.com
PE (x) 25.8 27.2 25.9 21.7 16.4 +91 22 66242431
Source: Company, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.
 Shriram City Union Finance (SCUF IN) India Equity Research | Result Update

Exhibit 1: Actuals vs estimates

Estimate % variation
Rs mn Actual Comments
Emkay Consensus Emkay Consensus
Net income 7,134 7,153 8,137 -0.3% -12.3% In line with estimates
PPOP 4,324 4,100 4,336 5.5% -0.3% Lower opex led to PPOP beat
PAT 120 1,236 1,194 -90.3% -89.9% Higher provisions led to earnings miss
Source: Bloomberg, Company, Emkay Research

Valuation and view

As an after effect of demonetization, slowing growth and deteriorating asset quality has clouded
SCUFs near term outlook. While the transition led jump in NPLs was as anticipated, higher credit
losses in the quarter gone by surprised negatively. We expect demand in SCUFs core and
relatively high yielding businesses viz. SME and two-wheeler to improve. Meanwhile, growth in
the housing finance business has slowed down considerably. We therefore prune our FY18/19E
estimates to factor in slower growth and higher credit costs for core as well as housing finance
business. We maintain our HOLD rating with a revised SOTP-based target price of Rs2,100.

Exhibit 2: Revision in earnings estimates

FY18E FY19E
Y/e Mar (Rs m)
Earlier Revised % Change Earlier Revised % Change
Net interest income 32,762 33,624 2.6% 39,427 40,248 2.1%
PPOP 20,087 20,462 1.9% 24,328 24,635 1.3%
PAT 7,623 6,643 -12.9% 9,986 8,782 -12.1%
EPS (Rs) 115.6 100.7 -12.9% 151.5 133.2 -12.1%
BV (Rs) 849 828 -2.4% 977 938 -4.0%
Source: Company, Emkay Research

Exhibit 3: SoTP of Rs2,100 per share

Particulars Stake Value Rs mn Value per share
Shriram City Union 100.0% 130,234 1,975
Shriram Housing Finance 77.3% 10,734 125
SOTP Value 2,100
Source: Company, Emkay Research

Exhibit 4: Quarterly results summary

Rs m 4QFY17 3QFY17 4QFY16 % yoy % qoq FY17 FY16 % yoy
Net Interest Income 7,134 7,624 6,223 14.6% -6.4% 28,972 24,450 18.5%
Other Income 5 6 163 -97.0% -18.3% 29 212 -86.3%
Net Income 7,139 7,630 6,386 11.8% -6.4% 29,001 24,662 17.6%
Operating Expenses 2,815 2,977 2,961 -4.9% -5.4% 11,359 10,430 8.9%
Cost to Income Ratio (%) 39.4% 39.0% 46.4% 39.2% 42.3%
Operating Profit 4,324 4,653 3,425 26.2% -7.1% 17,642 14,232 24.0%
Provisions 4,118 2,242 2,561 60.8% 83.7% 9,105 6,163 47.7%
Provisions to Operating Profits (%) 95.2% 48.2% 74.8% 51.6% 43.3%
Profit before tax 206 2,412 864 -76.2% -91.5% 8,536 8,069 5.8%
Tax 86 835 309 -72.3% -89.7% 2,976 2,771 7.4%
Tax Rate (%) 41.6% 34.6% 35.8% 34.9% 34.3%
PAT 120 1,577 555 -78.3% -92.4% 5,561 5,298 5.0%

Total AUM (Rs bn) 231,320 225,430 195,750 18.2% 2.6% 231,320 195,750 18.2%

Gross NPA 15,370 9,930 9,800 56.8% 54.8% 15,370 9,800 56.8%
Net NPA 4,100 1,250 2,970 38.0% 228.0% 4,100 2,970 38.0%
Gross NPA (% of loans) 6.7% 4.5% 5.2% 6.7% 5.2%
Net NPA (% of loans) 1.8% 0.6% 1.6% 1.8% 1.6%
Provision coverage ratio (%) 73.3% 87.4% 69.7% 73.3% 69.7%
Source: Company, Emkay Research

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May 3, 2017 2
 Shriram City Union Finance (SCUF IN) India Equity Research | Result Update

Exhibit 5: AUM growth remain healthy Exhibit 6: AUM mix remains largely unchanged

250.0 20.0% 100%

17% 15% 11% 11% 13%
15.0%
200.0 80% 18% 17% 15%
10.0% 17%
150.0 30%
5.0% 60% 18% 18% 18% 18%
100.0 0.0%
13%
-5.0% 40%
50.0 55%
-10.0% 51% 53% 54%
20% 40%
0.0 -15.0%
4Q'14

4Q'15

4Q'16

4Q'17
1Q'14
2Q'14
3Q'14

1Q'15
2Q'15
3Q'15

1Q'16
2Q'16
3Q'16

1Q'17
2Q'17
3Q'17
0%
FY13 FY14 FY15 FY16 FY17

AUM (Rs bn) Growth (% yoy; RHS) Small Enterprises Two wheeler Loan against gold Others
Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 7: SME business drives growth Exhibit 8: Net interest margins falls sharply on regulatory migration

60% 15.0%
40% 14.5%
14.0%
20% 13.5%
0% 13.0%
-20% 12.5%
12.0%
-40% 11.5%
-60% 11.0%
10.5%
1Q'15

2Q'15

3Q'15

4Q'15

1Q'16

2Q'16

3Q'16

4Q'16

1Q'17

2Q'17

3Q'17

4Q'17

10.0%

3Q'14
1Q'13
2Q'13
3Q'13
4Q'13
1Q'14
2Q'14

4Q'14
1Q'15
2Q'15
3Q'15
4Q'15
1Q'16
2Q'16
3Q'16
4Q'16
1Q'17
2Q'17
3Q'17
4Q'17
Small Enterprises Two wheeler Loan against gold
Source: Company, Emkay Research Source: Company, Emkay Research

Exhibit 9: Asset quality worsens Exhibit 10: Credit costs remain elevated

8.0% 100% 8.0%

7.0%
80% 7.0%
6.0%
5.0% 60% 6.0%
4.0%
3.0% 40% 5.0%
2.0%
20% 4.0%
1.0%
0.0% 0% 3.0%
4Q'15
1Q'13
2Q'13
3Q'13
4Q'13
1Q'14
2Q'14
3Q'14
4Q'14
1Q'15
2Q'15
3Q'15

1Q'16
2Q'16
3Q'16
4Q'16
1Q'17
2Q'17
3Q'17
4Q'17

2.0%
2Q'15
1Q'13
2Q'13
3Q'13
4Q'13
1Q'14
2Q'14
3Q'14
4Q'14
1Q'15

3Q'15
4Q'15
1Q'16
2Q'16
3Q'16
4Q'16
1Q'17
2Q'17
3Q'17
4Q'17
GNPA (%) NNPA (%) PCR (%)
Source: Company, Emkay Research Source: Company, Emkay Research

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May 3, 2017 3
 Shriram City Union Finance (SCUF IN) India Equity Research | Result Update

Key Financials (Standalone)

Income Statement
Y/E Mar (Rs mn) FY15 FY16 FY17 FY18E FY19E
Net interest income 20,620 24,049 28,972 33,624 40,248
Other income 1,265 676 29 32 35
Fee income 0 0 0 0 0
Net income 21,885 24,726 29,001 33,656 40,283
Operating expenses 8,936 10,494 11,359 13,194 15,648
Pre provision profit 12,949 14,232 17,642 20,462 24,635
PPP excl treasury 12,949 14,232 17,642 20,462 24,635
Provisions 4,538 6,163 9,105 10,320 11,227
Profit before tax 8,411 8,068 8,536 10,142 13,408
Tax 2,830 2,771 2,976 3,499 4,626
Tax rate 34 34 35 35 35
Profit after tax 5,581 5,298 5,561 6,643 8,782

Balance Sheet
Y/E Year End (Rs mn) FY15 FY16 FY17 FY18E FY19E
Equity 659 659 659 659 659
Reserves 40,352 44,457 48,823 53,924 61,163
Net worth 41,011 45,116 49,483 54,583 61,822
Deposits 0 0 0 0 0
Borrowings 124,021 144,084 170,420 206,724 255,548
Total liabilities 180,380 208,544 245,365 292,695 353,555
Cash and bank 7,814 6,419 6,371 5,121 2,893
Investments 9,817 7,923 7,145 10,336 12,777
Loans 158,903 191,406 229,614 274,824 335,274
Others 3,024 1,947 1,453 1,554 1,665
Total assets 180,380 208,544 245,365 292,695 353,555

Key Ratios (%)

Y/E Year End FY15 FY16 FY17 FY18E FY19E
NIM 13.9 13.6 13.6 13.1 12.9
RoA 3.2 2.7 2.5 2.5 2.7
RoAE 15.9 12.3 11.8 12.8 15.1
GNPA (%) 2.7 4.7 6.3 8.4 8.5
NNPA (%) 0.6 1.4 1.7 3.2 3.0

Per Share Data (Rs) FY15 FY16 FY17 FY18E FY19E

EPS 84.7 80.4 84.3 100.7 133.2
BVPS 622.3 684.3 750.4 827.8 937.6
ABVPS 610.9 652.8 706.9 729.8 825.4
DPS 15.0 15.0 15.0 20.0 20.0

Valuations (x) FY15 FY16 FY17 FY18E FY19E

PER 25.8 27.2 25.9 21.7 16.4
P/BV 3.5 3.2 2.9 2.6 2.3
P/ABV 3.6 3.3 3.1 3.0 2.6
Dividend Yield (%) 0.7 0.7 0.7 0.9 0.9
Source: Company, Emkay Research

Emkay Research is also available on www.emkayglobal.com, Bloomberg EMKAY<GO>, Reuters and DOWJONES.

May 3, 2017 4
 Shriram City Union Finance (SCUF IN) India Equity Research | Result Update

Growth (%) FY15 FY16 FY17 FY18E FY19E

NII 13.1 16.6 20.5 16.1 19.7
PPOP 11.2 9.9 24.0 16.0 20.4
PAT 7.1 (5.1) 5.0 19.5 32.2
Loans 23.6 20.5 20.0 19.7 22.0

Quarterly (Rs mn) Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17

NII 6,223 6,862 7,351 7,624 7,134
NIM (%) 12.9 13.7 14.0 13.9 12.5
PPOP 3,425 4,139 4,525 4,653 4,324
PAT 555 1,818 2,045 1,577 120
EPS (Rs) 8.42 27.57 31.02 23.92 1.82
Source: Company, Emkay Research

Shareholding Pattern (%) Mar-16 Jun-16 Sep-16 Dec-16 Mar-17

Promoters 33.8 33.8 33.8 33.8 33.8
FIIs 17.4 16.1 17.5 20.1 21.9
DIIs 1.8 2.0 5.8 6.2 6.0
Public and Others 47.0 48.1 43.0 39.9 38.4
Source: Capitaline

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May 3, 2017 5
 Shriram City Union Finance (SCUF IN) India Equity Research | Result Update

Emkay Rating Distribution

BUY Expected total return (%) (Stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (Stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (Stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (Stock price depreciation) of upto (-) 10% within the next 12-18 months.
SELL The stock is believed to underperform the broad market indices or its related universe within the next 12-18 months.

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