Positives seen for Shriram City: Housing foray, high return ratios

The Shriram City Union Finance (SCUF) stock is the top gainer in the past one month, delivering 20 per cent, much ahead of the four per cent returns by the benchmark BSE 200 index. In fact, it has had a robust run in the past one year with gains of 53 per cent. And, if analysts are to be believed, the rally has more legs.

The company is a niche play on the small and medium enterprises (SME) segment, which forms over half of its loan book currently. After demonetisation, there were fears that credit demand from the SME segment could be hit as they struggle to protect their share from their larger, organised peers. But, in recent interactions with investors, the management has indicated that demonetisation blues are fading away soon and things should normalise by June 2017. 

Additionally, the company has recently completed the process of improving sales force productivity, which will also be a growth enabler, apart from bringing in higher cost efficiencies. 

Not surprising then, most analysts are positive on the company's prospects. Analysts at Antique Stock Broking, for instance, expect the company’s assets under management to grow by 19 per cent over FY16-19 and earnings to grow by 28 per cent in this period. Strong provision coverage ratio (PCR), too, lends comfort in case of any rise in bad loans. 

“Shriram City Union Finance holds a PCR of 81 per cent, which is higher than most of its NBFC peers like Shriram Transport, Mahindra & Mahindra Financial Services, amongst others,” believe analysts at domestic brokerage Motilal Oswal Securities. Thus, even if the company’s bad loans increase, it may not have to make aggressive provisions. Strong customer relationships, business positioning and healthy return ratios are other factors that weigh in the company's favour. 

Investors are also positive on the company’s entry in the housing finance business, which is likely to contribute significantly to both top line as well bottom line in the next three-four years, believe analysts. This business’ contribution, however, is not adequately baked into current estimates and hence could provide a leg-up to valuations going forward, as it achieves scale. Any slowdown in credit demand from the SME sector, though, is a key downside risk for the company.

At current levels, the stock still trades at 1.2 times FY18 estimated book value, below its historical average one-year forward price-to-book ratio of about 2.2 times.