Shriram City Union Finance - India's leading SME Financier


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Shriram City Union Finance - India's leading SME Financier

  1. 1. Shriram City Union Finance Ltd - A Structurally high growth business run by a great Management
  2. 2. Content Index • SCUF Limited – Investment Snapshot :- Slide #3 • Industry Overview :- Slide #8 • SCUF Limited - Company Overview :- Slide #14 • SCUF Limited – Investment rationale :- Slide #25 • Financials :- Slide #39 • Conclusion :- Slide #43 “ Specialists in discovering Multibagger stocks “
  3. 3. SCUF– Investment Snapshot (as on Mar 17, 2014) Recommendation :- BUY Maximum Portfolio Allocation :- 2% Investment Phases & Buying Strategy 1st Phase (Now) of Accumulation :- 80% Current Accumulation Range :- 950 to 1100 Rs Investors can start accumulating the stock at the current prices. Any correction in the stock should be used to buy more shares. We believe that an investor with a time frame of 5+ years is certain to make strong returns in this stock. Core Investment Thesis : We believe that there is a huge opportunity in MSME lending space. SCUF with its parentage and business model is extremely well suited to capture this opportunity profitably. Earnings growth over the next 3-5 years would ensure that the stock delivers strong returns to Investors. Current Market Price – Rs. 992.05 Current Dividend Yield – 0.86% Bloomberg / Reuters Code –SCUF. IN/ SHCU.BO BSE / NSE Code – 532498/ SHRIRAMCIT Market Cap (INR BN / USD Mn) – 82.30 /1346.5 [1 USD – Rs. 61.12] Total Equity Shares [Mn]– 55.42 Face Value – Rs. 10 52 Week High / Low – Rs.1230 / 850.5 Promoter’s Holding – 37.57% FII - 25.71% DII - 28.71% Other Holdings - 8.01% “ Specialists in discovering Multibagger stocks “
  4. 4. Dear Members, Before we present the Multibagger Idea for this month, let me give a broad overview of the current market situation. While the SENSEX & NIFTY are up by just around 5%, there has been a massive rally in quality Mid-Caps and Small-Caps over the last few months. Most of the quality businesses with strong growth prospects have been re-rated strongly over the last 12 months, with several stocks witnessing 50%-100% returns. We are pleased with the fact that majority of our recommendations have continued to deliver exceptional returns through both the good and bad market phases of the last several years. We believe that generating such exceptional returns would take far more hard-work going forward. While improving economic scenario can boost earnings growth, scope for valuation re-rating has considerably decreased. This is especially true of stocks in sectors such as Consumers, IT, Pharma, Building Products etc. The exceptions are present, but we need to dig extensively to uncover them. We are looking at several Ideas across the spectrum that can provide strong risk-adjusted returns for Investors. Even though the job of a stock picker would become difficult going forward, we would love to prove ourselves under all economic conditions. We have been continuously and forcefully writing over the last 2 years about the huge undervaluation in good Mid-Cap and Small-Cap stocks. We had highlighted about the healthy consolidation in these stocks and the transfer of shareholding from weak hands to strong hands. If you look at the pattern of our recommendations over the last few years, we have concentrated heavily on stocks that are leaders in niche sub-sectors witnessing huge growth. Most of these stocks have strong structural factors (Shift from un-organized to organized, Rural boom, Export opportunity, Consumer brands, Discretionary spends etc) driving their growth. We continue to HOLD on to these stocks as we believe that their growth rates would improve and the their owner earnings will grow as their competitive positioning gets strengthened. The high ROIC nature of these businesses would ensure that these stocks would continue to deliver strong returns over a long horizon (more than 3 years). We would keep you updated on our positioning in these stocks through our Special Investment report to be released next month. At the same time, we also understand that two broad trends that worked well for the last 5 years can get disturbed going forward and hence there is a need to re-align ourselves to the new paradigm. There is enough “ Specialists in discovering Multibagger stocks “ Our Research Desk’s views on the Stock Idea
  5. 5. evidence to indicate that the trends of “Strong consumption growth at the cost of Investments” and “Rural outperformance over Urban peers” would weaken going forward. While these trends have structural elements in the form of Pent-Up demand and increasing aspirations of consumers, their immediate prospects over the next 3 years can be shaky with the Macro adjustments (Fiscal consolidation, subdued Inflation, Lower Rural hand-outs, Interest rate reversal etc) that we expect the next Government to undertake. This achieves even more significance in the light of the huge disparity in valuations of the stocks (Consumers Vs Industrials, Rural Vs Urban themes). You need to know, “Where the Puck is going and not where the Puck is”. For long term investors the problem with this shift is the lack of credible stocks in the bucket of “industrial Stocks” that can deliver consistently high returns on capital employed. Majority of them continue to have bad balance sheets and poor corporate governance practices. This makes the call of a Long term investor difficult. While we continue to look for the good outliers in this bucket (we have identified one stock), the easier way of going around this issue is by investing in High Quality cyclical stocks that can deliver strong returns through this phase. Our insistence on Investing in stocks such as VA Tech Wabag and Godrej Properties is a part of this broad theme. We would like to focus more on cyclicals that have an inherently strong business model but are affected by the performance of the broader economy. Our Idea for this month, “Shriram City Union Finance (SCUF)” fits this bill. The company’s primary lending segment of MSME’s are highly sensitive to the broader economic growth and thus the stock would be a good way to play the cyclical improvement in the overall economy going forward. More importantly, the company has a good business model coupled with a disciplined management. We believe that the growth drivers of SCUF are structural in nature and the opportunity size is huge. When you combined all these strengths with a reasonable valuation, the probability of the stock delivering Multibagger returns is strong. Size of the Opportunity (easily 10X growth opportunity in less than 10 years) :- SCUF’s primary segment of small ticket MSME loans (around 10 Lakhs) is a huge opportunity (Slide – 27) waiting to be tapped. This segment hardly has any access to formal credit and is served by unorganized players. SCUF’s understanding of this customer segment would help it to scale the business multi-fold going forward. If you really “ Specialists in discovering Multibagger stocks “ Our Research Desk’s views on the Stock Idea
  6. 6. need to understand the dynamics of this business, just check out with a few MSME’s. Our ground work has consistently showed that even the quality MSME’s are credit starved and a lender who can assess MSME’s well and collect dues on time can build a highly profitable business. We believe that a company which builds scale in this business can derive a huge competitive advantage over its peers. We believe that SCUF with the parentage of Shriram group is extremely well positioned to build a robust lending franchisee focused on MSME’s. The group is already India’s largest finance provider for the un-banked population. Shriram group from its Chits business to its CV business is focused on developing expertise to lend to the un-banked segment. The group’s DNA and culture allows it to scale up in an un-organized segment by empowering employees and making them accountable. Information on the company’s collection policy (Slide-16) would give a strong understanding of the same. Just look at the way the company has been able to scale up its second hand CV lending business (Shriram Transport Finance) over the last decade. While Banks have started focusing on the un-banked to shore up their deposit base, the lending to these people is still rare. Lending to un-organized segment requires far more nimbleness and we believe that this is difficult under a banking structure and NBFC’s will continue to dominate this space going forward too. Why Shriram City Union Finance and not Shriram Transport Finance ? Shriram Transport Finance (STFC) is undoubtedly a fantastic franchisee. STFC’s competitive strengths, robustness of lending book and valuations are definitely better than SCUF. The reason for favoring SCUF is purely based on the opportunity size and long term growth prospects. Since STFC is a monoliner, its growth would continue to be affected by the segment volatility. While the focus of a Monoliner would enable it to perform better than peers, these companies prospects would still be closely co-related with the Industry. STFC’s strong franchisee would help it to consistently improve market share and grow in the second hand CV business. Additionally, the cyclical bottom of the CV industry would also boost the short term performance significantly. However, a 10 year view on the company shows limited growth prospects compared with SCUF. We believe that STFC would do well going forward, but the a long term investor would be attracted more to SCUF. “ Specialists in discovering Multibagger stocks “ Our Research Desk’s views on the Stock Idea
  7. 7. Quality of the business and Future prospects :- Considering the past, we believe that the company would continue to deliver 20%+ ROE’s with ROA’s of over 3%. SCUF’s track record over the last 5 years has been superb (Slide – 26). Company’s strong support base amongst investors would ensure equity capital availability for growth. Long term returns cannot mimic the last decadal returns of STFC as the Securitization norms are not as favorable now as in the last decade. Nevertheless, continuous securitization of seasoned assets (Slide – 20) would ensure lower cost of funds and better ROE’s. While a lot of the current loan book is driven by the customers of the Shriram ecosystem (primarily Shriram Chits), we believe that the company’s franchisee has certainly grown enough to attract other quality MSME’s to it. More importantly, the company has built a strong organizational culture and the company’s imbibed learning's would allow it to replicate its success story across geographies and segments. Over the next 3 years, we believe that loan book mix would shift towards higher % of MSME loans. This would ensure the company to sustain current Yield on its loan book. We also believe that NPA’s would improve over the next 4-6 quarters leading to profit growth higher than NII growth. Earnings over the last year had been hit by one- off elements such as Telengana Issue (Andhra contributes about 48% of its overall business) and change in gold loan regulations. We believe that the growth would return to 25% levels over the next year. Hence, we believe that the stock can be a good buy in a market in which quality stocks are not cheap. The stock is currently trading at about 2.3X (F) Book Value and 10X (F) earnings. We would advice Investors to BUY the stock aggressively in case of any price decline. “ Specialists in discovering Multibagger stocks “ Our Research Desk’s views on the Stock Idea Regards, [ Gokul Raj . P, Head – Investment Research ]
  8. 8. Industry Overview “ Specialists in discovering Multibagger stocks “
  9. 9. MSME Loan Market “ Specialists in discovering Multibagger stocks “ • MSME’s are significant growth drivers of the Indian economy and contribute 45% of the manufacturing output and 40% of exports. MSME have a demand of about Rs.32.5 trillion out of which a third of it is only addressed currently. • The growth drivers for NBFC’s in the MSME finance sector include - financing niche segments such as second hand machinery, under penetration of bank credit, better collection mechanisms and strong relationships build over the last decade.
  10. 10. Commercial Vehicle Loan Disbursements “ Specialists in discovering Multibagger stocks “ • During the past five years till FY13 the disbursements grew by about 8% in line with CV sales. However, LCV disbursements grew faster on account of faster growth in LCV sales. LCV disbursements grew by about 26% over the past five years due to improved player focus and higher finance penetration. • Crisil Research expects the CV finance industry to grow by about 16-18% to about Rs.900 Bn in FY18 led by growth in domestic CV sales, increase in finance penetration and improvement in LTV ratio’s. • Over the next five years with the pick up in the economy the LTV ratio’s are also likely to inch marginally higher from about 70% in FY13 to about 75% in FY18.
  11. 11. Gold Loan Lending “ Specialists in discovering Multibagger stocks “ segment wise share of Gold Loan Market • The Organized gold loan market in India in FY12 is estimated to be about Rs.1250 Bn with the market recording robust growth of 78% during the years 2010-12. • The overall gold loans for both the organized and unorganized market is expected to grow at an average rate of about 18-20% till 2016. • The share of NBFC’s in the gold loan market has increased from about 18.4% in FY07 to about 45.6% due to high LTV, Low documentation and quicker approval and disposal of loans.
  12. 12. Two Wheeler Finance Market “ Specialists in discovering Multibagger stocks “ • The two wheeler financing market is expected to steadily increase from about Rs.77 Bn in FY11 to about Rs.243 Bn in FY18. • Finance penetration dropped sharply in 2008-09 due to rising delinquencies which forced many players to exit the business. However stringent credit norms and availability of credit information through CIBIL have helped players expand their customer base. • Crisil expects the finance penetration to improve gradually to about 26% in FY14 and to about 30% in FY18 aided by credit bureaus. Further, Crisil also expects financiers to expand their reach to tier-3 and tier-4 cities to tap the latent demand for two wheeler loans.
  13. 13. Key Lending Parameters “ Specialists in discovering Multibagger stocks “
  14. 14. Company Overview “ Specialists in discovering Multibagger stocks “
  15. 15. SCUF - A Snapshot “ Specialists in discovering Multibagger stocks “ • SCUF is a deposit accepting NBFC is a major player in the small ticket finance retail space. SCUF offers a comprehensive range of loan products including loans for purchase of consumer durables,2,3 and 4 wheeler finance ,Personal Loans, Retail Loans and retail gold loans.
  16. 16. Lending Process “ Specialists in discovering Multibagger stocks “
  17. 17. Growing Branch Network “ Specialists in discovering Multibagger stocks “ • SCUF has a total of 1021 branch network as on Sep,30,2013 with about 297 branch network being on a shared basis and the remaining 724 are owned branches. Own branches have risen from about 339 branches in FY08 to about 724 branches currently. • SUCF’s shared branch network increases its cross selling opportunities apart from significantly reducing their operational expenses. SCUF has strong presence in south India with Andhra Pradesh contributing about 48% of the business followed by Tamilnadu which contributes about 32% of its business. • SCUF has traditionally been strong in the south due to a strong branch network and better service quality which has enabled the company to dominate the southern market.
  18. 18. Diversified Product Portfolio “ Specialists in discovering Multibagger stocks “ • SCUF has successfully diversified their product portfolio which consists of loans to the small enterprise finance segment, loans against gold, Product Finance loans, pre-owned and new vehicle loans and personal loans. Each of the products differs in terms of the average tenure, average yield, average interest rate and average size of loan. • As of March 31,2013 about 40.33% of the assets under management comprised loans to small entrepreneurs, 30.24% of assets under management comprised of loans against gold, 13.24% of assets under management comprised of product finance loans ,12.34% of assets under management comprised pre-owned and new vehicle loans and 3.84% of assets under management comprised personal loans. • SCUF’s diverse revenue streams reduce their dependence on any particular product thereby enabling it to spread its risk exposure across segments.
  19. 19. Strong AUM Growth “ Specialists in discovering Multibagger stocks “ • SCUF has leveraged its four decade experience in financing business which has enabled the company’s AUM to grow at a CAGR of 36% from FY08 to FY13. A large chunk of the growth in the recent past is attributable to the small business loans (40% of AUM) and loan against gold (30% of AUM). • SCUF’s small business loan clients are largely Shriram Chits’ customers / Chit customer referrals which augurs well for competitive lower loan origination costs in the SME segment, besides aiding a healthy asset quality profile. • Leveraging the group’s infrastructure and clientele SCUF’s small business loans have grown at a rapid pace of more than7X fold rise from INR 8.2bn in FY09 to INR 63bn in FY13. AUM growth over the past 5 Years AUM growth in line with Peers
  20. 20. Securitization Process “ Specialists in discovering Multibagger stocks “ • SCUF currently sells part of their assets under financing activities through securitization. In FY2013 the total book value of loans securitized was about Rs.1420.68 Cr • Gains arising out of securitization and assignment vary according due to a number of factors such as tenure of the securitized or the assigned portfolio, the yield on the portfolio securitized and the discount applied. Gains out of securitization are treated as income over the tenure of the agreements as per RBI guidelines on securitization of standard assets. Any loss incurred is recognized upfront. • SCUF is required to provide credit enhancement for the securitization transactions by way of either fixed deposits or bank guarantees and the aggregate credit enhancement amount outstanding was Rs.227.31 Cr in September,2013. The aggregate credit enhancement amount outstanding for legacy based transactions is Rs.269.38 Cr.
  21. 21. Strong Capital Adequacy “ Specialists in discovering Multibagger stocks “ • NBFC’s are expected to maintain a capital adequacy ratio consisting of Tier-I and Tier-II capital of not less than 15% of average risk weighted assets on balance sheet and risk adjusted value of Off-balance sheet items. SCUF had during the years 2011,2012 and 2013 had a CAR of about 20.53%,17.40% and 18.61% respectively during those three years which is above the RBI stipulated limit of 15%. • SCUF is adequately capitalized and hence grow its loan book without much issues. Equity capital is also open to the company consistently given the group’s track record. The company’s accounting policies are conservative and the provisioning is done on 120 day dues.
  22. 22. NIM – On par with Peers “ Specialists in discovering Multibagger stocks “ • SCUF operates on segments that carry a higher risk their yields are higher compared to banks and peers. Yields on SME loans range between 18-24%, Yields on personal loans between 24-27%, Yields on Auto and Two wheeler loans around 22%. • SCUF is backed by competitive cost of funds which has resulted in margins being healthy. NIM’s has consistently hovered around 11%. • SCUF ‘s ability to pass on rise in cost of funds as a major chunk of its customers have very few alternative capital sources. This has resulted in relatively stable margins for the company. NIM Comparison NIM of SCUF
  23. 23. AUM’s, Net NPA’s & Segment wise yields “ Specialists in discovering Multibagger stocks “
  24. 24. Healthy Balance Sheet “ Specialists in discovering Multibagger stocks “ • SCUF has been able to achieve an optimum liability mix by diversifying its funding sources through a right mix of fixed/floating rate loans to match the asset profile. • SCUF has successfully mitigated interest rate risk and ALM risk through retail liabilities which are at fixed rates with average maturity of 23 months and Institutional liability through a mix of floating and fixed with higher focus on floating rates. SCUF has a positive cumulative ALM mismatch across all buckets.
  25. 25. Investment Rationale “ Specialists in discovering Multibagger stocks “
  26. 26. Strong Historical Performance “ Specialists in discovering Multibagger stocks “
  27. 27. MSME Lending – A unique opportunity “ Specialists in discovering Multibagger stocks “ • SCUF’s strategy of focusing on the retail segment has paid off because of its fore sight into the potential of the business. The ticket size is about Rs 1 to 10 Lakhs and SUCF has a dominant market share of about 42% in the segment. • SCUF has strong presence in semi urban and rural areas of South India which augurs well for its small loans business. Company’s stated focus on growing this segment of the lending book would generate significant returns going forward. The company can significantly scale up its MSME lending business and it has just scratched the surface of this huge opportunity.
  28. 28. MSME Loan Book “ Specialists in discovering Multibagger stocks “ • SCUF’s loan book had historically been driven by MSME segment which has grown at a three year CAGR of 80% which is much higher than other segments. • SCUF’s SME loan is expected to grow at a CAGR of 30-35% in the next three years i.e from 2014-16.
  29. 29. Loan Book outlook “ Specialists in discovering Multibagger stocks “
  30. 30. Geographic Presence in Unbanked Areas “ Specialists in discovering Multibagger stocks “ • SCUF currently has about 979 branches out of which about 591 are owned branches and the remaining 388 are shared locations. • SCUF currently has presence in about 8 states such as UP, Bihar, MP, Chhattisgarh, Orissa, West Bengal, Tripura and Manipur which are heavily under banked thereby providing huge opportunities. projects. • SCUF currently has presence in about 6 states such as Maharashtra, Andra Pradesh, Assam, Arunachal Pradesh, Jharkhand, Nagaland and Rajasthan which are moderately under banked in 50-60% districts. • SCUF currently has presence in about 11 states such as TN, Kerala, Sikkim , Gujarat , Punjab Karnataka, Pondicherry, Haryana, ,J&K, Mizoram and Meghalaya which are adequately banked but offer enormous potential due to the growth opportunities in these states. • SCUF has significant scope to leverage current network by improving disbursements and revenue per branch by introducing the entire financial solutions range while keeping costs under check. Further, the shriram network provides the ability to have pilot launches across existing networks without increasing branch setup cost.
  31. 31. Cost of Funds “ Specialists in discovering Multibagger stocks “ • SCUF’s cost of funds increased by 12.6% which is up by about 160 bps in FY13 due to higher interest rates and reliance on higher retail and public borrowing. • Despite the base rate of scheduled commercial banks coming down by 50 bps in FY13, higher deposit and money market rates have put pressure on SUCF’s borrowing cost. SCUF’s borrowing mix consist of 58% share from banks, 24% from retail, 9% from market and 9% from public issue of NCD’s. • SCUF ‘s cost of funds is likely to moderate going forward as improved scale would lead to higher rating and thus lower cost of funds. The company is likely to benefit from a lower interest rate regime due to cooling off in inflation in recent months. Cost of Funds of SCUF & Peers
  32. 32. Cost to Income Ratio “ Specialists in discovering Multibagger stocks “ • SCUF’s cost to income ratio increased from about 31.9% in FY10 to about 37% in FY13 due to higher employee expanses. • SCUF had added employees from Shriram Chit funds to its own rolls taking the headcount to about 19,000 resulting in employee expanse/income ratio rising from 6% in FY11 to about 13.4% in FY13. Shriram chit fund employee incentives have now come down to about 1.8% of income in FY13 as against 4.8% in FY12. • However with SCUF management plans of adding about 100 branches in a given year, the cost to Income ratio is likely to stabilize around 37% in the medium term . Cost to Income ratio of SCUF & Peers
  33. 33. Moderating Gold loan Portfolio “ Specialists in discovering Multibagger stocks “ • SCUF’s loan growth had been growing at a rapid 92% since FY09 which is way ahead of any other comparable peer. SCUF had begun to see moderation in gold loan portfolio after the regulatory changes. SCUF has about 22% of AUM from the gold loan portfolio currently. • SCUF’s gold loan typically has a tenure of about 3-6 months and provides average yield of about 18-20%. • SCUF’s gold loan is least exposed to risk as the tenure is only 3-6 months which reduces the risk to three months of price volatility. While other players in the segment are facing asset quality issues, SCUF had the least asset quality issues from the segment due to its strong lending practices SCUF Loan growth compared with Peers Moderating gold loan of SUCS & Peers
  34. 34. Good Asset Quality “ Specialists in discovering Multibagger stocks “ • Despite a strong 36% growth in AUM SUCS has maintained a good asset quality with GNPA of 5% and 4% in Q1 and Q2 of FY 14 down from 16/30% in 3Q/4Q FY13. The sharp increase in NPA’s in FY13 is due to change in recognition norms in NPAS which has been reduced to 120 days as against 150 days earlier. • SCUF’s asset quality is in line with peers such as M& M Finance, though Sundaram and Bajaj Finance have relatively better asset quality which can be attributed to their highly conservative lending practices. • SCUF’s GNPA’s asset quality is unlikely to deteriorate much and is likely to remain at 2.2% of its assets size.
  35. 35. Better credit rating to lower credit cost “ Specialists in discovering Multibagger stocks “ • SCUF funds its capital requirement through a combination of sources - with term and working capital loans being sourced from banks, NCD, commercial paper and fixed deposit from retail customers . • SCUF has been able to achieve its funding at a competitive cost from a range of sources despite a challenging domestic and global economy. SCUF is likely to strengthen its balance sheet which would further improve its credit rating, thereby enabling the company to source its funds from various sources at more competitive rates and enabling the company to further improve their margins and profitability.
  36. 36. Asset Liability Management “ Specialists in discovering Multibagger stocks “ • SCUF monitors liquidity risk through their Asset Liability Management function with the help of liquidity gap reports. SCUF categorizes all assets and liabilities into different maturity profiles and evaluates these items for any mismatches especially in the short term. • SCUF’s AUM policy caps the maximum mismatch in various maturities in line with RBI guidelines. SCUF to address liquidity risk mobilize long and short term funds at competitive interest rates according to the requirements of the situation.
  37. 37. Asset Liability Match “ Specialists in discovering Multibagger stocks “
  38. 38. Stake by reputed Institutional & PE players “ Specialists in discovering Multibagger stocks “
  39. 39. Financials “ Specialists in discovering Multibagger stocks “
  40. 40. Earnings Projection – P&L Account • SCUF’s revenues are expected to grow by 15% in FY14 & FY15 driven by strong loan book growth due to recovery in the GDP growth. • SCUF reported Profit before Depreciation and Tax of about Rs.690.68 Cr in FY13 and is expected to be about Rs.766.70 Cr and Rs.881.66 Cr in FY14 and FY15 respectively. • SCUF is likely to report PAT of Rs.497.07Cr in FY14 and Rs.571.60Cr in FY15 with an EPS of Rs.89.69 and Rs.103.14 in FY14 and FY15 respectively. • SCUF interest and financial charges in FY 13 was at Rs.1410.48 Cr and is expected to be about Rs.1621.87 Cr and Rs.1865.15 Cr in FY14 and FY15 respectively. • SCUF’s depreciation in FY13 was at Rs.24.94Cr and is likely to be at Rs.30.30 Cr and Rs.34.84 Cr in FY14 and FY15 respectively. Specialists in discovering Multibagger stocks “ Particulars(Rs. Cr) 2012 20132014E 2015E INCOME : Operating Income 2056.683099.613564.55 4099.23 Other Income 0.17 0.32 0.32 0.32 Total Income 2056.853099.933564.87 4099.55 EXPENDITURE : Interest & Financial Charges 928.581410.481621.87 1865.15 Operating & Administrative Expenses 595.22 998.771176.30 1352.75 Profit before Depreciation & Tax 533.05 690.68 766.70 881.66 Depreciation 13.78 24.94 30.30 34.84 Profit Before Tax 519.27 665.74 736.40 846.81 Tax 181.19 216.35 239.33 275.21 Profit After Tax 338.08 449.39 497.07 571.60 EPS 63.52 79.69 89.69 103.14
  41. 41. Concerns & Reasoning “ Specialists in discovering Multibagger stocks “ 1.) competition from Banks : SCUF along with other NBFCs faces competition from banks. With slowdown in large corporate segment drying, banks have been focusing on the SME segment and retail loan products. Banks have also started focusing on home loans given the huge untapped potential and healthy asset quality profile in this segment. Banks with access to low-cost CASA deposits are better placed to price loans at competitive rates. 2.) Geographic al Concentration: SCUF’s portfolio is largely concentrated in Andhra Pradesh, Tamil Nadu and Maharashtra. Even as the company plans to expand into new regions, the company’s operations would be concentrated in southern India over the foreseeable future. Regulatory changes in state laws could adversely impact the company’s financials 3.) Focus on high risk segments: Relatively under-banked segments, i.e higher risk segments are the target audience of SCUF. Asset-quality challenges arising from its focus on relatively riskier segments are amongst the key risks that the company faces. The company, however, has maintained a healthy asset quality, supported by origination and monitoring practices that have been imbibed from the group’s experience. Asset quality would be a key monitor able given that company is exposed to the SME and personal loan segments. 4)Liquidity Risk: Liquidity risk arises due to non-availability of adequate funds or non-availability of adequate funds at an appropriate cost, or of appropriate tenure, to meet the business requirements. This risk is minimized through a mix of strategies, including asset securitization/assignment and temporary asset liability gap.
  42. 42. Price Chart • SCUF had corrected sharply during the past year from Rs.1230 to Rs.1015.5. • The Stock has exhibited volatility during the year and provides value to investors with medium to long term perspective. • Technically the stock has strong support at Rs. 950 levels thereby providing limited downside risk. “ Specialists in discovering Multibagger stocks “ Share Holding % Dec Sep Jun Mar 2013 2013 2013 2012 Promoters 37.57 37.57 57.31 57.31 FII 25.71 25.87 26.19 25.21 DII 3.00 3.04 3.95 4.34 Others 33.72 33.52 12.55 13.14
  43. 43. Conclusion While investing in a Finance business, the most important component to analyze is the quality of Management. In a leverage business, a disciplined and rational management is a pre-requisite for investing. Growth for Finance companies is always there but how profitable is the growth needs to be monitored. An aggressive management’s poor decision making would come to light only after several years. Hence, we believe that Management plays a key role while investing in Finance stocks. We have very little doubt in saying that Shriram group is certainly only of the best lenders in the country. Their understanding of the un-banked segment is un paralleled. They have built strong moats in lending to such segments and the opportunity size for lending to this segment is huge. The company has been aggressive on growth, yet conservative on lending practices. We certainly believe that Investors can have a peaceful sleep by investing with such Managements. The group is compared to Wells Fargo by several value investors. The value creation at Wells Fargo is a well known legend. The company’s bid to banking license, if approved, would certainly make the company a hot favorite among several investors. With cheaper cost of funds and a strong lending franchisee, the value creation could simply be stunning. We believe that a banking license would be a huge bonus for Investors. SCUF is currently a 6000 Cr company and the opportunity size would enable that the company’s market capitalization to grow several fold over the next 5 years. At the current price, the stock is valued at 11X earnings and 2.5X book value. For Investors who buy at current reasonable valuations, the company can certainly compound its value consistently over the next decade and thus deliver Multibagger returns. “ Specialists in discovering Multibagger stocks “
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  45. 45. THANK YOU “ Specialists in discovering Multibagger stocks “