RESULT UPDATE

SHRIRAM CITY UNION FINANCE

NIMs expand; growth robust
India Equity Research| Banking and Financial Services

Shriram City Union Finances (SCUF) Q2FY12 PAT of INR 811 mn (up 46% Y-o-Y, flat Q-o-Q) was ahead of our expectation. Disbursements continued to be robust (up 58% Y-o-Y) led by business/gold loans while margins improved 40bps to 12.1% aided by repricing of the loan book. Gross NPLs were sustained at 1.7% even as credit cost was capped at 173bps. We maintain BUY with a TP of INR 650 (assigning 2x multiple to 12 months rolling book).

EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Outperformer High Equalweight

MARKET DATA (R: SHCU.BO, B: SCUF IN)

Business, gold loans buoy disbursement growth

Business and gold loans mainly contributed to the 58% Y-o-Y growth in disbursement (at INR 28.6 bn). Gold loans form ~30% of the loan book. It securitized INR 8 bn of loans and on-book AUMs grew 12% Q-o-Q (53% Y-o-Y) to INR 89 bn. The management sustained its focus on enterprise loans as key growth driver. We expect disbursements and therefore the loan book to register 30-34% CAGR over FY11-13E. Dedicated efforts (new branches, processes) to scale up the business lending are yielding results.

CMP Target Price 52-week range (INR) Share in issue (mn) M cap (INR bn/USD mn)

: INR 523 : INR 650 : 710 / 486 : 49.8 : 26 / 528

Avg. Daily Vol.BSE/NSE(000) : 3.5 SHARE HOLDING PATTERN (%)

Margins expand 40bps to 12.1%, cost of funds up

Upward repricing of the loan book (with a higher churn) led to 150bps expansion in yields and 40bps increase in NIMs to 12.1%. This was despite higher contribution from low-yielding gold loans in incremental disbursements. Cost of funds inched up by 150bps with banks raising base rates in May-August period. Going forward, we believe rising interest rates will keep NIMs under pressure hence build in 10.0%-10.2% margin for FY12-13E. SCUFs gross NPLs came off marginally at 1.72% (from 1.83% in Q2FY11) while credit cost was capped at 173bps (net NPLs were contained at 0.4%). Amidst macro issues, we expect gross NPAs to move up, but only to remain sub 2.5% by FY12E.

Others 31.5% Promoters* 53.2% FIIs 15.1% MFs, FIs & Banks 0.2%
* Promoters pledged shares (% of share in issue) : NIL

Outlook and valuations: Positive; maintain BUY

Even as traction in disbursements sustains amid a decline in margins, we believe asset quality will continue to provide succour. We like SCUF for its presence in high-yielding, high-growth business and a superior RoA of ~3.4%. The stock is trading at 6.8x FY13E earnings for 26% CAGR in EPS over FY11-13E and at 1.5x FY13E adjusted book for sustainable RoE of 20% plus. We maintain BUY/Sector Outperformer recommendation/rating on the stock.

PRICE PERFORMANCE (%) Stock 1 month 3 months 12 months (4.4) (10.1) (25.0) Nifty 8.4 (2.3) (10.5) EW BFSI Index 3.4 (8.1) (18.0)

Kunal Shah
+91 22 4040 7579 kunal.shah@edelcap.com

Financials
Year to March Q2FY12 Q2FY11 Growth (%) Net oper. Inc. (INR mn) 2,399 1,645 45.8 PAT (INR mn) 811 556 45.8 BV per share (INR) Diluted EPS (INR) 16.1 11.1 45.8 Price/ Book (x) Diluted P/E (x) Q1FY12 2,045 829 16.3 Growth (%) 17.3 (2.2) (1.3) FY11 7,233 2,406 244.8 48.8 2.1 10.7 FY12E 9,601 3,240 299.0 65.8 1.7 8.0
Nilesh Parikh
+91 22 4063 5470 nilesh.parikh@edelcap.com

Suruchi Chaudhary
+91 22 6623 3316 suruchi.chaudhary@edelcap.com

November 1, 2011

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

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Banking and Financial Services

Chart 1: Disbursement growth momentum sustained 36
29 22 14 7 0
Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

(INR bn)

Product finance

Secured loan

Personal loan

Business loan

Chart 2: NIMs expand benefiting from loan repricing 24.5

21.0 17.5
(%)

14.0 12.8 11.6 10.4 9.2 8.0

(%)

14.0 10.5 7.0

Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Yield on advances (LHS)

Cost of funds (LHS)

Margins (RHS)

Chart 3: Borrowing profile

Subordinate Debts 7% Cash Credits 9% CPs 1%

NCDs 42%

Term loans 41%

Source: Company
2 Edelweiss Securities Limited

Shriram City Union Finance

Chart 4: Gross NPLs come off marginally 3.0
2.4 1.8
(%)

90.0 78.0 66.0 54.0 42.0 30.0

(%)

1.2 0.6 0.0

Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12

Gross NPAs

Net NPAs

Prov. Cov. (RHS)

Source: Company

Financials snapshot Year to March Operating income Interest expanded Net operating income Other income Total income Operating expenses Pre-provision profit Provisions and write off Operating profit Depreciation Profit before tax Tax Profit after tax Diluted EPS (INR) Ratios (%) Cost/income Tax rate

Q2FY12 4,764 (2,365) 2,399 25 2,424 (826) 1,599 (346) 1,253 (27) 1,226 (415) 811 16.1 34.1 33.9

Q2FY11 2,954 (1,309) 1,645 1 1,647 (563) 1,084 (235) 849 (17) 832 (276) 556 11.1 34.2 33.2

Growth (%) 61.3 80.7 45.8 1,671.4 47.2 46.7 47.5 47.1 47.6 63.3 47.3 50.3 45.8 45.8

Q1FY12 4,151 (2,106) 2,045 131 2,176 (610) 1,566 (337) 1,229 (26) 1,203 (374) 829 16.3 28.0 31.1

Growth (%) 14.8 12.3 17.3 NA 11.4 35.4 2.0 2.6 1.9 3.0 1.9 10.8 (2.2) (1.3)

FY11 13,118 (5,885) 7,233 191 7,425 (2,584) 4,841 (1,160) 3,681 (75) 3,606 (1,200) 2,406 48.8 34.8 33.3

FY12E 18,195 (8,594) 9,601 207 9,809 (3,161) 6,647 (1,693) 4,954 (83) 4,871 (1,632) 3,240 65.8 32.2 33.5

(INR mn) FY13E 22,173 (10,911) 11,262 225 11,487 (3,589) 7,897 (2,096) 5,801 (90) 5,711 (1,902) 3,809 77.3
31.2 33.3

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Banking and Financial Services

Company Description
SCUF was incorporated in 1986 as a deposit accepting NBFC. Prior to 2002, it was exclusively engaged in transport finance with special emphasis on financing pre-owned commercial vehicles to small road transport operators. In 2002, it extended its product lines to include small-ticket retail financing, viz., consumer durables, two wheelers, personal, and enterprise loans. It deliberately went slow on disbursements in the CV segment, which has become a key area of its group company Shriram Transport Finance. The companys operations are largely concentrated in the southern states of Andhra Pradesh, Tamil Nadu, and Karnataka and the western region (particularly Maharashtra). SCUF offers only small-ticket retail products (ranging from INR 25,000-250,000) with shorter tenures (12-30 months), which generate yields in excess of 20%. It leverages the large investor base (1.2 mn investors) of the Shriram Groups chit fund entities to continuously build its asset book and utilises 600 chit fund outlets for marketing its products and collecting loans. The company has been successful in keeping its default rates at lower levels by better assessment of its customers and effective collection of its loans and has maintained best in class NIMs at 10-11%.

Investment Theme
SCUF follows a unique and sound business model with presence in the high-yielding, highgrowth, small-ticket retail finance segment (consumer durable finance, auto loans, personal loans, business finance, and retail gold loans), and superior sustainable RoEs of 20% plus. The concept of chit fund-based lending is gradually losing its sheen and SCUF aims to fill this space by lending to these customers, thereby retaining decades old relationships.

Key Risks
SCUF operates in the small-ticket retail finance segment in semi-urban and rural areas and may face stiff competition from banks, other financial institutions, and multinational players, which have access to cheap funds. Our earnings estimates may not fructify if the company is unable to maintain its spreads at expected levels of 10-12% due to inability to maintain yields at 22-24%, amidst stiff competition. Risk of frauds and NPA accretion is inherent to the retail lending business and NPA provisioning could be higher than our estimates in case of any economic slowdown or dip in income levels.

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Shriram City Union Finance

Financial Statements
Income statement Year to March Income from operations Interest charges Operating income (net of interest expenses) Other income Net revenues Operating expense - Employee exp - Depreciation /amortisation - Other opex Preprovision profit Provisions PBT Taxes PAT Reported PAT Basic number of shares (mn) Basic EPS (INR) Diluted number of shares (mn) Diluted EPS (INR) DPS (INR) Payout ratio (%) Growth ratios (%) Year to March Operating income growth Net revenues growth Opex growth PPP growth PAT growth Operating ratios (%) Year to March Yield on assets Cost of funds Spread Net interest margins Cost-income Tax rate FY09 9,221 4,307 4,914 129 5,043 2,465 358 221 1,886 2,578 781 1,797 627 1,170 1,170 45.1 25.8 51.8 22.4 4.1 18.9 FY10 10,692 4,668 6,024 335 6,359 2,332 361 47 1,924 4,028 1,166 2,862 920 1,942 1,942 49.2 39.4 49.2 39.4 4.0 11.9 FY11 13,118 5,885 7,233 191 7,425 2,659 437 75 2,147 4,766 1,160 3,606 1,200 2,406 2,406 49.5 48.4 49.2 48.8 6.0 14.5 FY12E 18,195 8,594 9,601 207 9,809 3,244 633 83 2,528 6,564 1,693 4,871 1,632 3,240 3,240 49.5 65.2 49.2 65.8 7.0 12.6 (INR mn) FY13E 22,173 10,911 11,262 225 11,487 3,680 759 90 2,830 7,807 2,096 5,711 1,902 3,809 3,809 49.5 76.7 49.2 77.3 8.0 12.2

FY09 37.3 35.0 26.5 44.3 33.5

FY10 22.6 26.1 (5.4) 56.2 66.0

FY11 20.1 16.8 14.0 18.3 23.9

FY12E 32.7 32.1 22.0 37.7 34.6

FY13E 17.3 17.1 13.4 18.9 17.6

FY09 22.0 11.8 10.2 11.7 48.9 34.9

FY10 20.1 10.4 9.7 11.3 36.7 32.1

FY11 18.6 9.8 8.8 10.2 35.8 33.3

FY12E 19.8 10.9 8.9 10.4 33.1 33.5

FY13E 19.8 11.4 8.4 10.0 32.0 33.3

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Banking and Financial Services

Balance sheet As on 31st March Liabilities Equity capital Reserves Net worth Preference capital Subordinate debt Secured loans Unsecured loans Deferred tax liability Total liabilities Assets Loans Investments Current assets Current liabilities Net current assets Fixed assets (net block) Total assets Balance sheet ratios (%) Loan growth EA growth Gross NPA ratio Net NPA ratio Provision coverage RoE decomposition (%) Year to March Operating income (net of int exp)/Assets Other income/Assets Net revenues/Assets Operating expense/Assets Provisions/Assets Taxes/Assets Total costs/Assets ROA Equity/Assets ROAE Valuation metrics (%) Year to March Diluted EPS (INR) EPS growth (%) Book value per share (INR) Adjusted book value per share (INR) Diluted P/E (x) Price/ BV (x) Price/ Adj. BV (x) Dividend yield (%) (INR mn) FY13E 0.1 495 17,656 18,152 0 6,330 98,665 2,170 281 125,597 0.1 125,483 66 11,203 11,530 (327) 375 125,597 0.1 28.5 26.2 2.4 0.6 75.0

FY09 0.1 491 6,606 7,097 0 4,172 39,045 11 (31) 50,294 0.1 37,540 61 16,412 4,091 12,321 372 50,294 0.1 36.6 46.6 2.1 1.0 53.9

FY10 0.1 492 9,508 10,000 0 5,300 41,286 10 (15) 56,581 0.1 47,310 66 14,055 5,191 8,864 341 56,581 0.1 26.0 12.7 2.5 0.9 65.0

FY11 0.1 495 11,632 12,127 0 5,330 65,696 2,253 (158) 85,247 0.1 69,890 55 23,729 8,721 15,008 294 85,247 0.1 47.7 51.1 1.9 0.4 77.2

FY12E 0.1 495 14,318 14,814 0 5,830 76,690 2,215 29 99,578 0.1 97,686 66 9,873 8,383 1,490 336 99,578 0.1 39.8 16.8 2.1 0.5 77.0

FY09 11.7 0.3 12.0 (5.9) (1.9) (1.5) (9.2) 2.8 13.5 20.6

FY10 11.3 0.6 12.0 (4.4) (2.2) (1.7) (8.3) 3.7 16.1 22.7

FY11 10.2 0.3 10.5 (3.8) (1.6) (1.7) (7.1) 3.4 15.7 21.7

FY12E 10.4 0.2 10.7 (3.5) (1.8) (1.8) (7.1) 3.5 14.6 24.0

FY13E 10.0 0.2 10.2 (3.3) (1.9) (1.7) (6.8) 3.4 14.7 23.1

FY09 22.4 3.2 154.8 149.3 23.3 3.4 3.5 0.8

FY10 39.4 75.4 203.5 197.6 13.3 2.6 2.6 0.8

FY11 48.8 24.0 244.8 240.6 10.7 2.1 2.2 1.1

FY12E 65.8 34.7 299.0 292.4 8.0 1.7 1.8 1.3

FY13E 77.3 17.6 366.4 356.0 6.8 1.4 1.5 1.5

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RATING & INTERPRETATION

Company
Allahabad Bank Bank of Baroda HDFC ICICI Bank Infrastructure Development Finance Co Karnataka Bank LIC Housing Finance Oriental Bank Of Commerce Punjab National Bank Rural Electrification Corporation South Indian Bank Union Bank Of India Mahindra & Mahindra Financial Services

Absolute reco
REDUCE HOLD HOLD BUY HOLD BUY HOLD REDUCE REDUCE BUY HOLD HOLD HOLD

Relative reco
SO SO SU SO SU SO SP SU SU SO SP SO SP

Relative risk
H L L L M L M H L L H L M

Company
Axis Bank Federal Bank HDFC Bank Indian Overseas Bank ING Vysya Kotak Mahindra Bank Manappuram General Finance Power Finance Corp Reliance Capital Shriram City Union Finance State Bank of India Yes Bank

Absolute reco
BUY BUY HOLD HOLD HOLD REDUCE HOLD BUY BUY BUY HOLD BUY

Relative reco
SO SO SP SU SP SP SU SO SP SO SP SO

Relative Risk
M M L H H L M L M H L M

ABSOLUTE RATING
Ratings Buy Hold Reduce Expected absolute returns over 12 months More than 15% Between 15% and - 5% Less than -5%

RELATIVE RETURNS RATING

Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return

Sector return is market cap weighted average return for the coverage universe within the sector

RELATIVE RISK RATING

Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector

Risk ratings are based on Edelweiss risk model

SECTOR RATING
Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return

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Banking and Financial Services

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (91-22) 4009 4400, Email: research@edelcap.com
Vikas Khemani Nischal Maheshwari Head Institutional Equities Head Research vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +91 22 2286 4206 +91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Allahabad Bank, Axis Bank, Bank of Baroda, Federal Bank, HDFC, HDFC Bank, ICICI Bank, Infrastructure Development Finance Co Ltd, Indian Overseas Bank, Karnataka Bank, Kotak Mahindra Bank, LIC Housing Finance, Manappuram General Finance, Mahindra & Mahindra Financial Services, Oriental Bank Of Commerce, Punjab National Bank, Power Finance Corp, Reliance Capital, Rural Electrification Corporation, State Bank of India, Shriram City Union Finance, South Indian Bank, Union Bank Of India, ING Vysya, Yes Bank Recent Research Date 31-Oct-11 Company Oriental Bank of Commerce ICICI Bank Bank of Baroda Title Weak assets marginalize profit; Result Update Steady core, steadfast asset quality; Result Update At its best; Result Update Price (INR) 290 Recos Reduce

31-Oct-11 31-Oct-11

931 771

Buy Hold

Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Rating Distribution* * 3 stocks under review > 50bn Market Cap (INR) 111 119 Hold 47 Reduce 15 Total 184 < 10bn 16 Rating Interpretation Rating Buy Hold Reduce 57 Expected to appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period

Between 10bn and 50 bn

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