Shriram City Union Finance Ltd - Research Report


Private Client Research




Finance - NBFC


Shriram City Union Finance Ltd

Reco Price
Rs. 1831.00
Price Target (1.5 - 2 Years)
Rs. 3660.00


July 20, 2016
CNX Nifty




AUM growth along with expected improved interest rate scenerio will drive the growth.

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 in results.

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.

Stock Data

CMP (Rs)
Face value (Rs)
52 Week Range (Rs)
1899.00 - 1332.25
Market cap (Rs Crores)
Price To Book Value (x)
P/E Ratio (x)

One Year indexed Stock Performance

Shriram City Union Finance LtdSensex
Shriram City Union Finance Ltd
Return (%)


(in %)

+91 22 6639 3000



SCUF specializes in lending to MSMEs. The development of this sector is integral to India’s aspirations towards economic growth. This sector nurtures entrepreneurship and innovation. Given that the MSMEs in the country contribute to 45% of all manufacturing activity, 40% of exports, around 17% to GDP and also employ the highest number of people after agriculture, a robust MSME sector can further accelerate the country’s growth rate. MSMEs typically do not necessitate huge investments while simultaneously acting as ancillary units to larger industries.

But, the sector needs finance for sustenance, and in this lies the industry’s biggest challenge. A mere 4% of the MSMEs are estimated to have access to formal finance. The Government of India has recognized the fact that, for MSMEs to become much more prominent contributors to GDP, funding options to them should be eased. It has accordingly created a Micro Units Development and Refinance Agency Bank (or MUDRA Bank) for regulating and refinancing all institutions engaged in the business of offering financial assistance to Micro- and Small Businesses. MUDRA Bank will also possess a corpus to offer Credit Guarantees to lenders of Micro/Small Businesses. Another progressive move taken towards benefiting the MSMEs, is the allocation of Rs. 1000 crores for technology startups. The Government seems focused on making the youth of India, the job creators and not the job seekers. Accordingly, measures towards skill development of youth and special focus on self-employment are steps in the right direction.


Shriram City Union Finance is engaged in non banking financial services. The company provides long term home loans. It provides growth capital to small enterprises. It also offers a range of options for financing the purchase of two wheeler vehicles across manufacturers and brands. Its customers in the space comprise replacement equipment manufacturers, traders, grain merchants, small hoteliers and caterers and similar such non-corporate businesses in semi-urban India. It offers loan against gold jewelry, primarily to individuals who do not have access to formal credit within a reasonable time, or to whom credit may not be available at all, to meet their short-term requirements. It offers loans to finance the purchase of new and pre-owned passenger and commercial vehicles, which includes three wheelers, four wheelers, pre-owned and new cars. It offers home loans, through its subsidiary, Shriram Housing Finance Ltd. (SCUF).

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Mar 14
Mar 15
Mar 16
Mar 17E
Mar 18E
  • Net Sales & Other Operating Income
  • Growth (%)
  • Total Expenditure
  • PBIDT (Excl OI)
  • Margin (%)
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • PBT
  • Tax
  • Profit after Tax
  • Margin (%)
  • Diluted EPS after Extraordinary Items
  • 3225.56
  • -
  • 1102.22
  • 2123.34
  • 65.83
  • 53.16
  • 2176.50
  • 1350.70
  • 825.80
  • 30.22
  • 795.58
  • 260.17
  • 535.41
  • 16.60
  • 91.43
  • 3561.70
  • 10.42
  • 1362.37
  • 2199.33
  • 61.75
  • 51.18
  • 2250.51
  • 1340.07
  • 910.44
  • 43.65
  • 866.79
  • 291.44
  • 575.35
  • 16.15
  • 88.09
  • 3998.19
  • 12.26
  • 1692.22
  • 2305.97
  • 57.68
  • 21.41
  • 2327.38
  • 1440.38
  • 887.00
  • 37.62
  • 849.38
  • 290.75
  • 558.63
  • 13.97
  • 83.64
  • 4450.56
  • 11.31
  • 1653.96
  • 2796.60
  • 62.84
  • 25.00
  • 2821.60
  • 1550.00
  • 1271.60
  • 35.00
  • 1236.60
  • 432.81
  • 803.79
  • 18.06
  • 120.35
  • 4950.00
  • 11.22
  • 1985.00
  • 2965.00
  • 59.90
  • 25.00
  • 2990.00
  • 1625.50
  • 1364.50
  • 35.00
  • 1329.50
  • 465.32
  • 864.18
  • 17.46
  • 129.39
Source: Stockaxis Research, Company Data


Overall ticket size is likely to increase and will be a function of both, higher disbursements in the Rs 20 lakhs – 50 lakhs category and a natural increase in the tenure and ticket sizes in the southern market complimented by matured customers.

The company is confident on achieving 15-18% loan growth from existing customers (business + inflation growth), with overall MSME growth at 20%+ (including new customers) in the next few years.

We value stock at a P/ABV of 4x FY2018E and P/E of 28.28x FY2018E which indicates a target price of Rs 3660, over the above mentioned duration.



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