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Shriram City Union Finance (SCUF), part of the Shriram group, has niche presence in small enterprise loans (52 per cent of assets under management or AUMs), gold loans. and two-wheeler loans (18 per cent each of AUMs). SCUF continues to witness healthy traction in these segments and expects small enterprise loans to drive growth, forming a bigger pie of 60 per cent in the AUM by FY17. Strong parentage gives it access to the parent's customer information, which keeps credit costs under check, in addition to pushing loan growth. The company commands pricing power and lends at rates above 15-18 per cent levels at credit costs lower than three per cent. This has rubbed off favourably on SCUF's profitability and is reflected in its net interest margin. This metric has expanded from 10.3 per cent in FY12 to 12 per cent in FY14 and is expected to reach 13.5-14 per cent by FY16, analysts say. SCUF has kept its return on average assets ratio stable at above three per cent over the past few years and analysts expect this ratio to inch up further to 3.8 per cent in FY16 versus 3.2 per cent in FY14.
Given that SCUF caters to the small business segment, entry barriers remain high. Competitive intensity in this segment is also relatively lower, as banks are selective while lending to these segments. In this light, the management remains confident of maintaining the good performance over the next two-three years. Not surprisingly, the scrip made a new 52-week high of Rs 2,072.7 on January 5 and has outperformed the S&P BSE Sensex over the past year. At current levels, it trades at 2.9 times FY16 estimated book value. Going forward, given the expectations of strong earnings growth and return ratios, this premium is likely to sustain, analysts say.
The company’s fully-owned housing finance subsidiary, which operates in the under-served affordable housing segment, is likely to witness healthy loan growth and profitability. SCUF has managed to keep asset quality pressures under check with gross non-performing assets (NPA) ratio at 2.7 per cent in FY14. A sharp correction in gold prices impacted asset quality in this segment, though experts believe the overall stress has eased across all its segments. SCUF's gross NPA ratio is likely to rise to 3.5 per cent in FY16 as the firm adopts the new norm of 90 days NPA classification from the prevailing 180 days. Most analysts remain positive on the scrip, though delayed economic revival is a key downside risk.
