NBFC

India I Equities

Result Update
Change in Estimates Target Reco

22 May 2013

Shriram City Union Finance

Healthy growth, elevated credit costs; Hold
Key takeaways SME finance driving credit growth. In 4QFY13, Shriram City Union Finances AUM growth eased to 17.8%, down 3.5% qoq to `158.3bn, on account of a calibrated slowdown in gold-loan financing (22% lower qoq). Growth in SME loans and two-wheeler loans, however, were robust, with their share in AUM rising to 40% and 12% respectively, from 29% and 10% a year ago. Led by the sharper focus on the rural hinterland, we expect 24.5% growth in AUM over FY13-15. Wider spread, stable productivity. Reported gross spreads increased 45bps yoy (95bps qoq), to 11.45%, on the greater rise in yields on advances compared to the cost of funds. An easing liquidity cycle and a higher share of SME finance are likely to aid a stable NIM of +11.5% over FY14/15. Despite the continuous investment in its employees, cost-asset was stable at 4.7%. We expect cost-assets to improve to 3.9% in FY15, compared to 4.3% in FY13, with the NBFC better leveraging its investments in the existing setup. Asset quality deteriorates, credit costs to be elevated. Gross NPA rose 76% yoy (30.1% qoq), while NPA coverage fell to 63.6%, compared to more than 70% over the last 11 quarters. Tighter NPA recognition norms (150 days) have led to an 80-bp yoy increase in credit costs, to 3.1% of AUM. We expect credit costs over FY14/15, at 2.5%, to be high (2.7% in FY13) to account for the larger share of two-wheelers and tighter provisioning norms. Our ` take. On the higher NIM assumptions, we increase our FY14 and FY15 estimated PAT 1.6% and 1% respectively. We raise our target from `1,161 to `1,214 and, on the higher RoE, value the NBFC at 2.4x FY14e BV (earlier 2.3x FY14e). Healthy credit growth and a niche model with a rural focus would support a 3.3%+ RoA over FY13-15. On fair valuations, we maintain a Hold. Our target is based on the two-stage DDM (CoE: 15.5%; beta: 1.1; Rf: 8%). Risk: A deficient monsoon could lead to higher-than-expected NPA.
Quarterly results (YE: Mar) 4QFY12 4QFY13 % yoy FY12 FY13 % yoy Key data

Rating: Hold Target Price: `1,214 Share Price: `1,126

SCUF IN / SHCU.BO

52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
Shareholding pattern (%)

`1,230 / `573 20112 / 6114 US$0.7m `62bn / US$1121mn 55.4m

Mar-13 Dec-12 Sep-12

Promoters - of which, Pledged Free Float - Foreign Institutions - Domestic Institutions - Public
Estimates revision (%)

57.3 42.7 25.2 4.3 13.2

55.0 45.0 25.1 5.8 14.1

FY14e

55.0 45.0 19.5 2.44 23.0

FY15e

NII (`m) PAT (`m) RoA (bps)

1.0 1.6 24

0.8 1.0 22

Financials (YE: Mar)

FY14e

FY15e

Net interest income (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PABV (x) RoE (%) RoA (%) Dividend yield (%) Net NPA (%)
Source: Anand Rathi Research

20,325 5,942 102 25.3 11.2 2.3 23.0 3.3 0.9 0.7

24,964 7,593 130 27.8 8.7 1.9 23.4 3.5 1.1 0.6

Net interest income (`m) Non-interest income (`m) Operating expenses (`m) Cost-income (%) Pre-provisioning profit (`m) Provisions(`m) PBT (`m) Tax (`m) PAT (`m) EPS (`)
Source: Company, Anand Rathi Research

3,428 19 1,236 35.9 2,211 609 1,602 626 976 16.3

4,611 101 1,716 36.4 2,996 1,135 1,862 604 1,257 20.6

34.5 420.7 38.8 55bps 35.5 86.2 16.2 (3.4) 28.8 26.0

10,586 189 3,770 35.0 7,006 1,765 5,242 1,816 3,425 32.5

16,610 115 6,229 37.2 10,497 3,840 6,656 2,161 4,496 40.3

56.9 (39.1) 65.2 225bps 49.8 117.6 27.0 18.9 31.3 24.1

Kaitav Shah
+9122 6626 6545 kaitavshah@rathi.com

Clyton Fernandes
+9122 6626 6744 clytonfernandes@rathi.com

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

22 May 2013

Shriram City Union Finance Healthy growth, elevated credit costs; Hold

Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Fig 4 PE band
11,049 44.1 230 11,278 46.1 4,253 7,025 46.6 1,783 5,242 1,816 3,425 42.4 65.4 6.5 16,610 50.3 115 16,725 48.3 6,229 10,497 49.4 3,840 6,656 2,161 4,496 31.3 81.1 8.5 20,325 22.4 173 20,498 22.6 7,616 12,882 22.7 3,974 8,908 2,966 5,942 32.2 101.6 10.0 24,964 22.8 259 25,224 23.1 9,296 15,928 23.6 4,544 11,384 3,791 7,593 27.8 129.9 12.0
1,600 14x 1,400 1,200 1,000 800 600 400 200 0 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Source: Bloomberg, Anand Rathi Research

Net interest income NII growth (%) Non-interest inc Total income Total income growth (%) Op. expenses Operating profit Operating profit growth (%) Provisions PBT Tax PAT PAT growth (%) FDEPS (`/share) DPS (`/share)

7,665 34.3 54 7,720 28.3 2,929 4,791 14.3 1,185 3,606 1,200 2,406 14.2 48.6 6.0

11x SCUF 8x 5x

Source: Company, Anand Rathi Research

Fig 2 Balance sheet (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Fig 5 Price-to-book band

524 16,826 96,221 12,915 126,485 107,209 178 13,277 5,821 126,485 52 31.3 55.1 554 21,974 127,271 12,069 161,867 133,554 730 21,775 5,808 161,867 55 32.3 24.6 585 28,461 152,503 15,086 196,635 162,237 876 27,340 6,182 196,635 58 19.8 21.5 585 35,234 187,092 19,612 242,522 201,174 1,139 33,148 7,061 242,522 58 22.7 24.0
1,600 2.8x 1,400 1,200 1,000 800 SCUF 1.6x 2.2x

Share capital Reserves & surplus Borrowings Current liab. & prov. Minority interests Total Liabilities Advances Investments Cash & Bank Bal Fixed & Other Assets Total Assets No. of shares (m) Borrowings growth (%) Advances growth (%)

495 11,625 73,278 7,756 93,155 69,134 55 21,654 2,312 93,155 50 57.0 46.1

600 400 200 0 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

1.0x

Source: Company, Anand Rathi Research

Source: Bloomberg, Anand Rathi Research

Fig 3 Key ratios

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Fig 6 SCUF vs Bankex

10.1 0.7 37.9 77.0 12.3 106.0 1.9 0.4 244.7 240.6 20.5 21.8 3.1 10.5 2.0 37.7 75.4 9.9 89.8 1.6 0.4 331.3 326.1 19.0 23.2 3.1 12.0 0.7 37.2 63.3 10.5 95.3 2.2 0.8 406.5 387.0 17.5 22.5 3.1 11.8 0.8 37.2 69.7 9.8 94.0 2.4 0.7 496.8 483.5 16.0 23.0 3.3 11.8 1.0 36.9 76.5 9.2 93.0 2.4 0.6 612.6 599.9 15.5 23.4 3.5
1,300 1,200 1,100 1,000 900 800 700 600 500 Aug-12 Sep-12 Nov-12 Dec-12 May-12 Mar-13 Jun-12 Jan-13 Oct-12 Feb-13 Apr-13 Jul-12 May-13 Bankex SCUF

NIM (%) Other inc. / Total inc. (%) Cost-Income (%) Provision coverage (%) Dividend payout (%) Borrowings-loans (%) Investment-Deposit (%) Gross NPA (%) Net NPA (%) BV (`) Adj. BV (`) CAR (%) RoE (%) RoA (%)

Source: Company, Anand Rathi Research

Source: Bloomberg

Anand Rathi Research

22 May 2013

Shriram City Union Finance Healthy growth, elevated credit costs; Hold

Results review
Fig 7 4QFY13 results vs expectations
(`m) 4QFY13 4QFY13e Var % 4QFY12 YoY % 3QFY13 QoQ %

Net interest income Pre-provisioning profits PAT

4,611 2,996 1,257

4,232 3,002 1,280

9.0 (0.2) (1.8)

3,428 2,211 976

34.5 35.5 28.8

4,248 2,567 1,125

8.6 16.7 11.7

Source: Company, Anand Rathi Research

Fig 8 4QFY13 results

(`m) 4QFY13 4QFY12 % Chg FY13 FY12 % Chg

Net interest income Non-interest income Operating costs (%) Pre-provisioning profits PAT

4,611 101 1,716 2,996 1,257

3,428 19 1,236 2,211 976

34.5 420.7 38.8 35.5 28.8

16,610 115 6,229 10,497 4,496

10,586 189 3,770 7,006 3,425

56.9 (39.1) 65.2 49.8 31.3

4QFY13

4QFY12

YoY

3QFY13

QoQ

AUM Borrowings Disbursements Gross NPA Net NPA Gross NPA % Net NPA % NPA coverage% Capital adequacy % Tier-1 %

158,280 127,270 40,730 2,940 1,080 2.2 0.8 63.6 19.0 14.9

134,310 96,230 46,050 1,670 410 1.6 0.4 17.4 13.8

17.8 32.3 (11.6) 76.0 163.4 64bps 42bps 155bps 115bps

164,010 131,860 43,453 2,260 670 1.6 0.5 70.4 16.2 12.5

(3.5) (3.5) (6.3) 30.1 61.2 62bps 30bps (675)bps 276bps 242bps

75.4 (1,184)bps

Source: Company, NM: not comparable due to change in NPA recognition policy

Robust loan growth driven by SME and gold loans Shriram City Union Finances AUM growth during 4QFY13 eased to 17.8%, down 3.5% qoq to `158.3bn, on account of a calibrated slowdown in gold-loan financing (22% lower qoq). Growth in SME loans and in twowheeler loans, however, was robust, with their share in AUM increasing to 40% and 12% respectively, from 29% and 10% a year ago.

Fig 9 Calibrated AUM growth

(`m) 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 0 25 50 (%) 75

Fig 10 Disbursement growth declines due to gold loans

(`m) 50,000 40,000 30,000 20,000 10,000 0 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 (%) 100 90 80 70 60 50 40 30 20 10 0 -10 -20

AUM

yoy growth (RHS)

Disbursements

Disbursements (RHS)

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Anand Rathi Research

22 May 2013

Shriram City Union Finance Healthy growth, elevated credit costs; Hold

Along with Shriram Chit Fund, the company has a huge base of over 4.5m customers; 1.6m are either its customers or Shriram Chit Funds. The huge customer base and strong brand name are expected to drive the NBFCs SME finance business and two-wheeler loan business. Led by the sharper focus on the rural hinterland, we expect 24% growth in AUM over FY1315 Spreads improve, likely to be stable ahead Reported gross spreads increased 45bps yoy (95bps qoq), to 11.45%, on the greater rise in yields on advances compared to the cost of funds. An easing liquidity cycle, a higher share of SME finance and incremental securitization are likely to aid a stable NIM of 11% in FY14.
Fig 11 AUM mix greater share of business finance and two-wheeler loans
100% 80% 60% 40% 20% 0% 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

- Auto Loans - Loans against gold

Source: Company

- Two wheeler Loans - SME Loans

- Personal Loans - Others

Share of off-balance-sheet assets to rise Under the new regulations, the NBFC securitized assets of `6bn in the quarter, compared to nil in 1HFY13. Ahead, the proportion of offbalance-sheet assets rising to nearly 20% of overall AUM by FY15 would help lower the cost of funds.
Fig 12 Off-balance-sheet loans to rise
(%) 100.0 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13

- on books assets
Source: Company

- off books assets

Anand Rathi Research

22 May 2013

Shriram City Union Finance Healthy growth, elevated credit costs; Hold

Productivity stable Despite the continuous investment in its employees, cost-asset was stable at 4.7%. We expect cost-assets to improve to 3.9% in FY15 compared to 4.3% in FY13, with the NBFC better leveraging its investments in the present setup.
Fig 13 Productivity to improve
(%) 6.0 5.0 4.0 3.0 2.0 1.0 0.0 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 (%) 90 80 70 60 50 40 30 20 10 0 3QFY10 4QFY10 1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 (%) 42 40 38 36 34 32 30

Cost-assets
Source: Company

Cost-income

Higher credit costs to sustain Gross NPA rose 76% yoy (30.1% qoq), while NPA coverage fell to 63.6% compared to more than 70% over the last 11 quarters. Tighter NPA recognition norms (150 days) have led to an increase in credit costs in the quarter, by 80bps yoy to 3.1% of AUM. We expect credit costs over FY14/15, at 2.5%, to be high (2.7% in FY13) to take into account the greater share of two-wheelers and the tighter provisioning norms.
Fig 14 Stable asset quality
(%) 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Gross NPA (%)

Source: Company

Net NPA (%)

NPA Coverage (%)

Anand Rathi Research

22 May 2013

Shriram City Union Finance Healthy growth, elevated credit costs; Hold

Valuation
On the higher NIM assumptions, we raise our FY14 and FY15 estimated PAT respectively 1.6% and 1%. We raise our target from `1,161 to `1,214 and, on the higher RoE, value the NBFC at 2.4x FY14e BV (earlier 2.3x FY14e). The healthy credit growth and the niche model with a rural focus would support a 3.3%+ RoA over FY13-15. On the fair valuations, we maintain a Hold. Our target is based on the two-stage DDM (CoE: 15.5%; beta: 1.1; Rf: 8).
Fig 15 Past one-year-forward PBV
2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2 1.0 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13
Source: Bloomberg, Anand Rathi Research

+2SD +1SD Mean - 1SD - 2SD

Risks

A slowdown in the rural economy would lead to slower loan growth and mounting delinquencies. A robust rural economy would lead to higher-than-expected credit growth.

Anand Rathi Research

22 May 2013

Shriram City Union Finance Healthy growth, elevated credit costs; Hold

Financials
We expect a 24.5% CAGR in AUM growth over FY13-FY15, with a 29.9% CAGR in net profit.
Fig 16 Income statement (`m)
Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Interest income Interest expended Net interest income Growth (%) Non-interest income Total income Non-interest income / total income (%) Operating expenses Employee expenses Other expenses Pre-provisioning profit Growth (%) Provisions Profit before tax Taxes Tax rate (%) Profit after tax Growth (%) Number of shares Earnings per share `
Source: Company, Anand Rathi Research

13,180 5,515 7,665 34.3 54 7,720 0.7 2,929 437 2,492 4,791 14.3 1,185 3,606 1,200 33.3 2,406 14.2 50 48.6

20,335 9,286 11,049 44.1 230 11,278 2.0 4,253 924 3,330 7,025 46.6 1,783 5,242 1,816 34.7 3,425 42.4 52 65.4

30,715 14,105 16,610 50.3 115 16,725 0.7 6,229 2,239 3,989 10,497 49.4 3,840 6,656 2,161 32.5 4,496 31.3 55 81.1

35,153 14,828 20,325 22.4 173 20,498 0.8 7,616 2,911 4,705 12,882 22.7 3,974 8,908 2,966 33.3 5,942 32.2 58 101.6

42,301 17,336 24,964 22.8 259 25,224 1.0 9,296 3,639 5,657 15,928 23.6 4,544 11,384 3,791 33.3 7,593 27.8 58 129.9

Fig 17 Balance sheet (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Share capital Reserves and surpluses Net worth Borrowings Deposits Total loans Liabilities Advances Investments Cash & bank balances Fixed & other assets Assets
Source: Company, Anand Rathi Research

495 11,625 12,121 73,278 7,756 93,155 69,134 55 21,654 2,312 93,155

524 16,826 17,350 96,221 12,915 126,485 107,209 178 13,277 5,821 126,485

554 21,974 22,528 127,271 12,069 161,867 133,554 730 21,775 5,808 161,867

585 28,461 29,046 152,503 15,086 196,635 162,237 876 27,340 6,182 196,635

585 35,234 35,818 187,092 19,612 242,522 201,174 1,139 33,148 7,061 242,522

Anand Rathi Research

Appendix
Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies
Rating and Target Price History (as of 21 May 2013)

1,320 1,220 1,120 1,020 920 820 720 620 520 420 320 220 Apr-10 Apr-09 Oct-09 Oct-08 Jan-09 Jan-08 Jan-10 Apr-08 Jul-08 Jul-09

SCUF
4

1 2 3 4

Date Rating 12-Dec-11 Buy 30-Jul-12 Buy 2-Nov-12 Hold 31-Jan-13 Hold

TP (`) 680 837 898 1,161

Share Price (`) 512 706 778 1,079

3 2 1

Apr-12

Oct-12

Oct-11

Oct-10

Jan-11

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >15% >25% Hold 5-15% 5-25% Sell <5% <5%

Anand Rathi Research Ratings Distribution (as of 28 Feb 2013) Buy Anand Rathi Research stock coverage (184) 65% % who are investment banking clients 4%

Jan-12

Hold 27% 2%

Jan-13

Apr-11

Apr-13

Jul-10

Jul-11

Jul-12

Sell 8% 0%

Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned. Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as Related Investments). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest. Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report.

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