Emkay Global Financial has given Buy recommendation for Shriram City Union Finance with a target price of Rs. 2700 in its research report issued on May 01, 2022

Emkay Global Financial’s report on Shriram City Union Finance

Shriram City Union Finance (SCUF) reported Q4 earnings of Rs3.03bn, broadly in line with our estimates. Coming off the festive season demand in Q3, two-wheeler disbursements declined qoq, while gold loan disbursements increased 15% qoq. NIMs declined 23bps qoq due to asset mix changes but were stable yoy. The cost-to-income ratio rose by 122bps qoq to 43.7% (Q3FY22: 42.5%), resulting in PPOP growth of 8% yoy. Asset quality improved, with GS3 and NS3 declining by 99bps/68bps qoq and credit costs declining 62bps qoq to 2.2%. Affordable housing subsidiary, Shriram Housing Finance Limited (SHFL), reported quarterly PAT of Rs0.22bn, up 56% yoy. AUM grew by 36% yoy/16%qoq to Rs53.6bn. SCUF is a play in retail financing across MSMEs, two-wheelers, gold, personal and auto, among others. With the merger on track (approved by stock exchanges and NCLT approached for an application), as well as its ability to leverage Shriram Capital’s customer base and appraise the “cash” businesses, SCUF is set to accelerate growth in the post-pandemic era. SHFL, with access to the wider Shriram network, seeks to gain share in the fast-growing affordable housing finance segment.


We retain our Buy rating on SCUF and raise our Mar’23 TP to Rs2,700 from Rs2,670, taking into account the revised growth outlook for the standalone business and SHFL. Considering the impending merger and the stock price movements since the merger announcement, we change our cost of equity estimate for SCUF from 13.1% to 13.5% to make it in line with SHTF. Our SOTP approach values 1) SCUF’s core lending business at 1.4x Mar’24E BVPS, using the excess return on equity method (ERE) for FY23-24 RoE of 14.5%, and 2) SHFL at 2.6x Mar’24E BVPS, accounting for its strong growth potential. We apply a holdco discount of 20% to this unlisted business.

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