Shriram City Union Finance NCD issuance

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Nitin Kumar Rohan Mandora

+ 91 22 3954 1468 + 91 22 3954 1509

August 10, 2011 Banking & Financials 1

August 10, 2011 10, 2011 Wednesday, August

Subscribe Healthy risk return offering

Subscribe: We recommend investors to subscribe to the issue given the strong fundamentals of the company including the benefit of Shriram brand name, healthy asset quality and diversified product offering. We note that the credit rating of the company at AA from CARE and AA-/Stable from CRISIL is only a notch lower than Shriram Transport and indicates high degree of safety. Infact the yield on the NCD is slightly higher than the recently closed India Infolines issue despite SCUF having a one notch higher rating from CARE. Though we believe that offered yields could have been marginally higher given that post the Shriram Transport issue at peak yield of 11.6% , several banks have increased their base rates by 50bp-75bp while the RBI increased policy rate by 50bp. However if we look at the current yield of 10.6% on the recently concluded Shriram Transport issue we reckon that it has already delivered capital gains of 5% (as shown below). We expect similar levels of capital gains on these NCDs as well (along with the coupon of 11.6%) as we believe the interest rates have already reached closer to their peak levels. Any moderation in interest rates in the medium term would provide further upside which we believe is highly likely. We thus recommend investors to subscribe to the issue.
Comparison with other issuers Issue summary Shriram City India Infoline Shriram Transport Issue Size Rs. Bn 7.5 7.5 10 AA/ Stable CRISIL AA-/Stable Rating CARE AA AAAA+ AA- (Stable) ICRA Peak Coupon 36 months 60 months 11.85% 11.70% 11.35% 12.10% 11.90% 11.60%

Other remarks The company pays 0.25% of the gross turnover to the Shriram Ownership Trust (SOT) as a license fee for using the "Shriram" brand name. Though this is the first public NCD issue by the company but liquidity in the erstwhile privately placed listed NCDs has been thin. So the investors may find it difficult to sell the NCD instruments.

Source: Company prospectus, Quant Global Research

Return computation on recently concluded Shriram Transport NCD issue based on on current yield of 10.6% Returns on Shriram transport NCDs issued in July-2011 Invested capital Rs, assumed Peak coupon offered for five years Future value at peak coupon of 11.6% Current yield Present value based on current yield Capital gains
Source: Company prospectus, Quant Global Research

100,000 11.60% 173,110 10.60% 104,603 4.6%

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Banking & Financials

Shriram City Union Finance (SCUF)

SCUF is a part of "Shriram Group" which runs many successful companies (flagship company: Shriram Transport Finance) It is a key player in the semi urban and rural areas and offers retail loans (Auto loans, Gold loans, Personal loans, Product finance) and small enterprise loans The company has incorporated a wholly owned subsidiary Shriram Housing Finance in Nov-2010 to begin its home loan operations The AUMs have grown at 34% CAGR over FY07-11 to Rs79.98 bn while the net profits have grown at a CAGR of 47% over the same period. Asset quality has been healthy with Gross NPLs improving from 2.27% in FY10 to 1.86% currently while Net NPLs improved from 0.71% in FY10 to 0.43% currently. The capital adequacy ratio is comfortable 20.53% (Tier-I of 16.36%) vs. mandated minimum of 15% by the end of FY12. The company has a network of 559 branches and 91 other business outlets across 17 states in India with a strong presence in the southern India (248 branches in Tamil Nadu, AP and Karnataka which collectively accounts for 91% of the total AUMs).
AUM profile: Gold loans have gained size in the total AUMs and is now the largest segment accounting for 28% of total AUMs Breakdown of AUM (%) Loan against Gold Small enterprise financial segment Vehicle Loan Product finance loan Personal Loan Others Total, Rs mn
Source: Company prospectus, Quant Global Research

Shareholding profile: Promoters own 53.2% stake in the company while top nine shareholders accounts for 94.3% of the total share capital
Key Shareholders Shri ram Enterpri s e Hol di ngs Shri ram Retai l Holdi ngs Va n Gogh Ltd Norwes t Venture Pa rtners IDBI Trus tees hi p (ICICI Ventures ) Bes s emer Venture Partners Acaci a Pa rtners LP As i abri dge Fund LLC Acaci a Ins ti tuti onal Others
Source: Company prospectus, Quant Global Research

FY09 8% 15% 46% 21% 9% 1% 46,295

FY10 16% 19% 40% 15% 10% 0% 52,155

FY11 28% 24% 24% 15% 9% 0% 79,980

Shareholding (Mn) 17.9 8.6 6.6 4.3 3.7 2.5 1.6 1.2 0.5 0.4

% of O/S 36.0 17.2 13.3 8.7 7.4 5.0 3.1 2.4 1.1 5.7

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Banking & Financials

Issue specifics
SCUF plans to raise Rs3.75bn with an option to retain another Rs3.75bn in case of oversubscription aggregating to Rs7.5bn through secured NCDs (face value of each NCD: Rs1,000). The issue opens on August 11 and will close on August 27 and will be listed on both NSE and BSE. The company plans to use the funds for its various financing and lending activities, repay its existing loans and meeting the working capital requirements.

NCD issue details Option I Tenure Coupon (%) - Institutional / Non-Institutional Coupon (%) - Reserved individual (<Rs 0.5 mn) Coupon (%) - Unreserved individual (>Rs 0.5 mn) Interest payment Put and call option
Source: Company prospectus, Quant Global Research

Option II 36 months 11.50% 11.85% 11.60% Annual NIL

60 months 11.60% 12.10% 11.85% Annual Exercisable at the end of 48 months

Comparison with other issuers Issue summary Shriram City India Infoline Shriram Transport Issue Size Rs. Bn 7.5 7.5 10 AA/ Stable CRISIL AA-/Stable Rating CARE AA AAAA+ AA- (Stable) ICRA Peak Coupon 36 months 60 months 11.85% 11.70% 11.35% 12.10% 11.90% 11.60%

Source: Company prospectus, Quant Global Research

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Banking & Financials

SCUF: Comparison with peers

SCUF has a much diverse product offering vs. its peers Company Shriram City Bajaj Finance Sundaram Finance Future Capital Manappuram Finance Muthoot Finance Cholamandalam Tata Capital Magma FinCorp Mahindra Finance
Source: Company prospectus, Quant Global Research

Consumer Durables Car 2 Wheeler 3 Wheeler CV Personal SME/ Business Gold Housing/ Property

AUM comparison with peers as at Dec-2010

140 AUM (Rs. Bn) 120 100 80 60 40 20 Cholamanda lam Shriram City Sundaram Manappura m Magma FinCorp Mahindra Fin. Bajaj Fin. 0.5% 0.0% 1.5% 1.0% Net NPA - RHS 2.0% 2.5%

Source: Company prospectus, Quant Global Research

Source: Company prospectus, Quant Global Research

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Banking & Financials

SCUF: Portfolio mix and borrowing profile

Product Portfolio mix: Average yield for the portfolio is about 22% with an average tenor of 24 months

Product portfolio Loa ns a ga ins t Gold Pre-owned a nd New Vehicle Loa ns Sma l l Enterpris e Fina nce Segment Product Fi na nce Loa n Pers ona l Loa ns
Source: Company prospectus, Quant Global Research

AUM Avg. Tenor (months) 28% 24% 24% 15% 9% 4 30 36 24 30

Avg. Yield 18-20% 22-24% 22-24% 24-26% 24-27%

Borrowing profile: Term loans and retail borrowings accounts for 75% of the total borrowed funds

13% 3% 9% 42% Term Loans Retail NCD Retail sub Debt 8% Inst. NCD CPs utilized cash credit 25%
Source: Company prospectus, Quant Global Research

The company plans to maintain its current borrowing mix going further with term loans from banks accounting for the majority of the borrowings at 40%-45%.

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Banking & Financials

Summary Financials
P&L, Rs mn: SCUFs net profits have grown at CAGR of 47% over last four years
Rs. Mn Income from operations Other i ncome Total Income Expense Fi na nci a l expens es Pers onnel Expens es Opera ti ng a nd other expens es Total expenses Provi s i ons PBT Ta x PAT
Source: Company prospectus, Quant Global Research

Balance sheet, Rs mn: SCUFs AUMs have grown at a CAGR of 34% over last four years
FY11

FY09 9,236 104 9,339 4,905 358 1,509 6,772 770 1,797 627.276 1,170

FY10 10,721 308 11,028 5,176 361 1,463 7,000 1,166 2,863 920 1,943

Rs. Mn Assets Current Assets, Loans & Advances Fixed & intangible assets (Net) Investments

FY09

FY10

FY11

13,180 29 13,209 5,885 437 2,122 8,443 1,160 3,606 1200.124 2,406

53,952 372 61 31 54,416

62,155 204 10 112 62,481

93,612 294 55 158 94,120

Deferred Tax asset (Net) Total Liabilities Secured Loans Unsecured Loans Current Liabilities Provisions Networth Total
Source: Company prospectus, Quant Global Research

39,045 4,183 3,313 778 7,097 54,416

41,361 5,310 4,639 1,171 10,000 62,481

65,695 7,583 7,009 1,712 12,121 94,120

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Banking & Financials

Summary Financials
Asset quality
Rs. Mn Total Loa n As s ets Net Loa n As s ets Gros s NPA Gros s NPA( %) Net NPA Net NPA (%) NPA Covera ge Rati o
Source: Company DRHP, Quant Global Research

FY09 37,540 37,120 778 2.07% 359 0.97% 54%

FY10 47,314 46,570 1,075 2.27% 332 0.71% 69%

FY11 69,892 68,894 1,297 1.86% 298 0.43% 77%

June 11 80,040 78,920 1,470 1.83% 350 0.44% 76%

SCUF has shown consistent improvement in its asset quality with Net NPA (%) declining to 0.44% while coverage ratio remains healthy at 76%

Spread Analysis Spread Analysis Income from Operations/ Avg. AUM Interest Expense/ Avg. AUM Gross Spread OPEX/ Avg. AUM Provisions & write offs/ Avg. AUM Net Spread
Source: Company DRHP, Quant Global Research

FY09 23.10% 10.80% 12.30% 6.20% 1.90% 4.20%

FY10 21.80% 9.40% 12.40% 4.80% 2.40% 5.20%

FY11 20.32% 7.98% 12.35% 5.13% 1.81% 5.41%

Average lending yield has shown a declining trend over last three years aided by rising share of relatively lower yielding gold loans. However Gross spreads have remained stable at ~12.4% led by efficient liability management. Improvement in opex and provisioning expenses have further resulted in a consistent improvement in net spreads

Key ratios and per share values Key Ratios BV/ Share (Rs.) EPS (Rs.) Capital adequacy (%) Tier I Capital (Rs. Mn) RoE
Source: Company DRHP, Quant Global Research

FY09 155 25.8 25.74% 0.71 20.47%

FY10 203 41.2 26.28% 0.99 22.72%

FY11 245.00 48.8 20.53% 1.19 21.75% RoE has remained healthy at ~22% while the Tier-I currently stands at over 16%

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Banking & Financials

Disclaimer
Ratings and other definitions
Stock rating system
BUY. We expect the stock to deliver >15 absolute returns. ACCUMULATE. We expect the stock to deliver 6-15 absolute returns. REDUCE. We expect the stock to deliver +5 to -5 absolute returns. SELL. We expect the stock to deliver negative absolute returns of >5 . Not Rated (NR). We have no investment opinion on the stock.

Institutional Equities Research coverage universe distribution of ratings

60% 49% 50%

40% 29%

30%

Sector rating system

OVERWEIGHT. We expect the sector to relatively outperform the Sensex. UNDERWEIGHT. We expect the sector to relatively underperform the Sensex. NEUTRAL. We expect the sector to relatively perform in line with the Sensex.

20% 14% 10% 7%

0% BUY ACCUMULATE REDUCE SELL

We, Nitin Kumar and Rohan Mandora, hereby certify that all of the views expressed in this presentation accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this presentation.
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Banking & Financials

Title

Thank you

Nitin Kumar nitin.kumar@quantcapital.co.inn 91 22 3954 1468 Rohan Mandora rohan.mandora@quantcapital.co.in 91 22 3954 1509
August 10, 2011

612, maker chambers IV, nariman point, mumbai 400 021, india phone 91 22 4088 0100, 3025 0100 fax 91 22 4088 0198, 3025 0198
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