Shriram City Union Finance (Outperformer)

Shriram City Union Finance (CMP: Rs375)

Mkt Cap: Rs14.7bn; US$366m Bloomberg code (SCUF IN)

Shriram City Union Finance (SCUF) is a fast growing retail financier with strategic focus on semi-urban and rural areas. Catering to an under-served but high-potential population, SCUF commands high yields of ~24%. A complementary product suite makes remote locations profitable, often not viable for monoline peers. Also, access to group franchise has enabled SCUF to fuel its high growth trajectory and minimize inception problems plaguing other players. SCUF’s robust business model rests on continuous grass-root level engagement with customers, and stellar collection and recovery competencies. Increasing operating efficiency and an improving funding profile would lead to 63% PAT CAGR over FY07-10E with a ~45bp rise in RoA (3.3% by FY10). At 2.1x FY09E and 1.7x FY10E adjusted book, valuations are attractive. Initiating coverage with a 12-month price target of Rs550/ share – 2.5x FY10E book.

A formidable business model, fortified by group network: SCUF, targeting the under-served hinterlands of India, is a force to contend with in rural retail financing. Also, group capabilities allow SCUF to tackle teething problems and effect faster growth. Regular engagement of field executives with customers enables SCUF to cultivate strong customer relationships, assess them more accurately, identify their needs and rein in delinquencies. The in-house and integrated (across products) credit and recovery team imparts greater control as well as offers scope for operating leverage.

Strong margin profile: SCUF earns high yields of ~24% as it faces limited competition on the back of deep penetration. A complementary product portfolio offers opportunity to cross-sell, and thus benefit from higher scale. This is in contrast to high collection and operating costs plaguing monoline competitors that have low single product volumes. SCUF’s core business would evidence rapid traction as NIMs stabilize at a healthy ~12% owing to its improving funding profile (with increased access to institutional funding) and balance sheet efficiency.

On a high growth trajectory; Outperformer: Buoyed by the huge potential, we expect 39% CAGR in disbursements and more than tripling of AUM for SCUF over FY07-10. We expect SCUF to deliver 63% CAGR in earnings over FY07-10, driven by ~60% CAGR in NII and improving operating leverage. Initiating coverage with Outperformer and a price target of Rs550/ share based on 2.5x FY10E adjusted book.

Key valuation metrics
Year to 31 March	FY06	FY07	FY08E	FY09E	FY10E
Net profit (Rs m)	317	516	958	1,582	2,247
yoy growth (%)	37.2	63.0	85.7	65.1	42.0
Shares in issue (m)	27.1	42.6	51.2	52.6	52.6
EPS (Rs)	11.69	12.1	18.7	30.1	42.7
EPS growth (%)	37.2	3.7	54.5	60.7	42.0
PE (x)	32.1	30.9	20.0	12.5	8.8
Book value (Rs/share)	42	81.9	160	180.8	218.3
P / BV ( x)	8.9	4.6	2.3	2.1	1.7
Adj. Book value (Rs/share)	38.1	78.7	158.2	178.6	217
P/ Adj. Book (x)	9.8	4.8	2.4	2.1	1.7
ROAE (%)	30.6	22.3	16.4	17.9	21.4