Shriram City Union Finance LTD.

Name1st Reco Date1st Reco priceTargetProspero RatingReport Date*
Shriram City22Mar2014 Rs. 1,020Rs. 1,800 – Rs. 2,0008 / 1022Mar2014

A) Company background:

Shriram City Union Finance is a deposit-taking NBFC, established in 1986 as part of the Shriram Group, which has ~38% stake in the company.

The company offers a range of retail loan products, comprising auto loans, two-wheeler loans, gold loans, small business loans, and personal loans, through over 1,000 business outlets across the country, with a major presence in South India. The company is one of the leading financiers in the under-penetrated MSME segment.

B) Investments arguments:

Unique business model: With a strong presence in the under-served markets (tier-2 and tier-3 towns) of South and Western India, Shriram City Union is one of the few organized lenders in the SME, 2-wheeler and used cars space. It sources customers from Shriram Groups’ vast ecosystem, thus lowering costs and ensuring access to the credit history of customer. Its branch network is vastly under-utilized and provides scope for efficiency gains.

Growth revival on cards: Gold price volatility and stringent regulations resulted in 50% de-growth in company’s gold loan portfolio over past twelve months. Other businesses have slowed down too, thanks to the problems in Andhra Pradesh and Tamil Nadu. Gold regulations have stabilized and other businesses seem to have bottomed out. We expect loan book growth to revive to 15-20% over FY15-16e.

Housing business to provide additional kicker: Its housing finance business has completed 3 years of operations, which makes it eligible to tap funds from NHB as well as the debt markets. Ability to source loans from Shriram’s huge ecosystem will ensure strong and profitable growth of over 100% for the next two years.

Attractive valuations: The Company clocks RoEs of ~20% despite having lower levels of leverage, making it as one of the best-in-class. Valuations at 1.7x FY15e book value are attractive given the strong growth potential. The stock should be bought at current prices.

C) Financials:

*Report Date may sometimes be different from Recommended Date.

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