Benefits of operating leverage to kick in as growth enhances:
Despite rising NIMs since FY12, Shriram City Union Finance (SCUF)’s ROAs have remained
largely stable at 3% levels, partially due to steep increase in its operating costs.
Its cost-to-income ratio moved up steadily from 37.2% in FY13 to 42.3% in FY16,
led by sharp increase in employee costs (taking chit employees on rolls). Going
forward, we believe the pace of increase in operating expenditure is likely to be
slower than the AUM growth, which can lead to benefits of operating leverage to
play out. While the management has guided for the cost-to-income ratio to fall below
40% in FY17, we conservatively build in cost ratios into our estimates.
AUM growth to improve led by higher ticket size:
AUM growth has been sluggish for the past three years (AUM CAGR of 7% over FY13–16),
given higher repayments due to reduction in tenure/ticket sizes in Andhra and Telangana
and stress in the gold portfolio. With the stress in Andhra and Telangana behind
and ticket sizes/tenure reverting back to their earlier levels, we expect AUM growth
to improve in FY17. The SME business, which is currently operated from just 400–500
branches, the company has a scope for expansion benefiting from its large network,
comprising of more than 25,000 employees and around 1000 branches. The company is
also working on increasing the tenure for its SME gold loans from current average
tenure of 3 months, but we expect at least three years for any visible improvement
Combination of intelligence and automation:
Contrary to market perception that the competition is way ahead of SCUF in terms
of technology adoption, the company highlighted that it has best-in-class technology
and has automated the entire process from sourcing to credit control to collection.
However, given the type of target customers, it sees little need to replace human
intelligence with automation. SCUF also uses analytics but has not reduced manpower
as it considers direct customer contact important. The company does not intend to
get enter segments such as real time loans and 24 hours loans in the near future.
Capital problem to be addressed in 2-3 years:
SCUF’s current tier 1 ratio stands at a high of 23%. The company intends to address
the high capital problem by:
- Improving business growth from 17% currently, to 20%+ over the near-to- medium term
- Infusing capital in subsidiary Shriram Housing, which is likely to grow much faster
given its lower book size and growth opportunities ahead.
Healthy growth momentum led by SME loans; gold loans could leap a positive surprise:
Steady traction in the SME portfolio and expanding its reach in the non-core markets
has been one of the key factors for growth for SCUF. While SME loans (50%+ of the
portfolio) will continue to remain foundation for growth, the recent uptick in gold
prices augurs well for its gold loan portfolio too. The share of gold loans in overall
AUMs has fallen from 36% in FY12 to just about 17% in FY16 led by the slump in gold
prices and a slew of regulatory changes hurting growth. We expect a CAGR of 17 %
in AUMs over the FY16-18E period (vs 7% in FY13-16) and with gold loans doing better,
growth can surprise positively.
Expanding reach in non-core markets is a key to growth expansion:
Apart from its strong foothold in the southern markets, SCUF is gaining traction
in the western and northern region as well. Based on management discussions, the
non-chit business in Maharashtra is growing well. Besides, Gujarat is emerging as
another growth market for SCUF’s SME loans, though there is some competition from
other banks and NBFCs as well. Moreover, UP and NCR are emerging as major non-core
markets for the company. While the two-wheeler financing business having penetrated
in these regions already, SCUF is now expanding its product offerings by taking
the flagship SME financing product to its newer non-core markets. Gradually expanding
the product portfolio in newer markets is a wise strategy rather than offering all
products to start with when the market understanding is at a very nascent stage,
in our view. Currently, out of the 100 odd branches, 85% are predominantly in 5
states only. Hence incremental branch expansion will largely be in non-core markets.
Also, SME loans, especially in non-core markets, will continue to be a major growth
driver going forward. MP, Chhattisgarh, UP and Haryana are the new potential growth
markets for SCUF, where it has already established its two-wheeler financing business
and will now drive growth with its SME loans. Currently, 10-12% of the SME business
comes from non-core markets, which we expect will inch up to 25-30% by FY19.