Buy Two Shriram Group Stocks For Robust Gains Up To 39%, Says Emkay Global

Emkay Global in its recent report on two leading NBFCs of Shriram Group namely Shriram City Union Finance & Shriram Transport Finance has given a buy call. The brokerage sees a potential upside of up to 39% from the current market prices of the stocks. Both the NBFCs, Shriram City Union Finance & Shriram Transport Finance, are going through the merger process. The long-awaited merger was approved by the board of the Shriram Group last year. With a combined distribution network of more than 3,500 branches, the combined business would be branded as Shriram Finance after the merger, as per reports.

Shriram City Union Finance

According to the brokerage, Shriram City Union Finance (SCUF) reported Q2FY23 PAT of Rs3.5bn, coming in 2% below our estimates due to higher-than-expected operating expenses. Disbursements grew 1.1% QoQ/24.9% YoY, led by the SME, Personal loan (PL) and LAP segments, while share of 2Ws and pre-owned 2Ws declined 119bps and 65bps QoQ, respectively. AUM grew 4.4% QoQ/18.7% YoY. Calculated NIMs rose by 43bps QoQ to 13.1%, with yields rising 69bps QoQ due to strong disbursement momentum in higher-yielding loans and the 50-bps rate hike in the gold loan segment. Cost-to-income increased 63bps QoQ to 43.8%, due to increase in gold loan branches (from 986 to 1,021 branches) and personnel additions (from ~28,000 to ~30,600), resulting in PPOP growth of 4.8% QoQ/19.3% YoY. Asset quality improved QoQ, with GS3 and NS3 declining 18bps and 3bps to 5.93% and 3.29%, respectively. PCR declined 102bps to 46.1%. Management overlay stood at Rs2.9bn (0.8% of AUM) vs. Rs3.4bn (1% of AUM) in Q1FY23. Factoring-in the utilization of overlay provisions, credit costs declined 14bps QoQ to 2.55%. 

Shriram Housing Finance (SHFL) clocked PAT at Rs0.34bn (+13% QoQ/81% YoY). SHFL saw its highest-ever quarterly originations in Q2, exceeding Rs10bn. Disbursements grew 31.9% QoQ/65.7% YoY. AUM as of Sep-22 stood at Rs65.5bn, with share of core home loans at 59% (Q1: 60%). Asset quality moderately improved, with GS3 & NS3 declining 3bps & 4bps QoQ to 1.52% & 1.17%, respectively. PCR rose to 24.2% (Q1: 23.6%). 

For SCUF, management guidance indicates NIMs will be maintained at 13%. Opex-toAUM is expected to moderate post-merger, with the ability to plug into the wider Shriram network. Credit cost is expected to be in the 2-2.5% range going ahead. 

 

Shriram City Union Finance - Buy for a target price of Rs 2,500 per share

"Considering the merger of SHTF with SCUF, we had previously linked our Target Price for SCUF with that of SHTF, using the merger-share ratio, i.e. ~1.55x. We retain our BUY rating with an unchanged Sep-23E TP of Rs2,500, for FY24-25E RoE of ~15%. Key downside risks: 1) stake-sale by current investors; 2) merger-integration related," the brokerage has said.

Stock outlook, Returns, ROE, 52 Low & High

The target price Rs Rs 2,500 per share given by the brokerage firm indicates that the stock is likely to surge 39% from its current level. On the NSE, the stock's current market price is Rs 1,809.10 per share. Its market capitalization is Rs 12,066.53 billion.

 
It has given 0.34% positive return in a week, whereas, in 3 month, it fell by 6.09%. Over a year, the stock gave 16.02% negative return. It has given 37.01% positive returns in the past 3 years. In the past 5 years, it has given 12.31% negative returns.

The stock's ROE is 12.41%. The stock recorded its 52 week low level on 08 March 2022 at Rs 1,416.05 and the 52 week high at Rs 2,303.60 on 30 November 2021, respectively.

Shriram Transport Finance

According to the brokerage, Shriram Transport Finance (SHTF) reported Q2FY23 earnings of Rs10.7bn (+10.5% QoQ/+38.3% YoY), much above consensus' and our estimates, driven by lower than expected P&L credit costs. Disbursement growth was at 6.6% QoQ, led by a 30% sequential growth in the new-vehicles segment, on a low base. Overall AUM grew 3.5% QoQ/11.2% YoY; calculated NIM for the quarter declined 29bps QoQ to ~7.8% due to a 23-bps drop in yields. Incremental CoFs for Q2 were higher sequentially, with Management expecting CoFs to rise by 8-10bps in Q3. Cost-to-income increased by 194bps QoQ to ~23.5% as a result of the one-off sales-tax settlement of Rs650mn. PPOP was flat QoQ at ~Rs21.1bn, in line with our estimate. Asset quality improved QoQ, with GS3 and NS3 declining 7bps and 4bps to 6.93% and 3.48%, respectively. PCR remained flat at 51.6%. Credit costs declined 48bps QoQ to 2.02%. During the quarter, Company utilized Rs0.95bn of management overlays. The restructured book stood at Rs6.8bn (at 7.6bn in Q1FY23). 

Management guidance for FY23E AUM growth of 12% for SHTF and 15% for the merged entity remains unchanged. Margins are expected to remain stable for the year, with the rise in CoFs to be offset by utilization of excess liquidity on the balance sheet for debt buyback. Management has guided for H2FY23 utilization of Rs5bn-6bn from the outstanding overlay pool of Rs17.4bn. 

Shriram Transport Finance - Buy For a target price of Rs 1,610 per share

"We retain our BUY rating, with an unchanged Sep-23E Target Price of Rs1,610/share, using the 'excess return on equity (ERE)' method for FY23E-24E RoE of ~14.4%, implying 1.2x Sep24E BVPS. Key downside risks: Merger integration risks and overhang of stake sale by investors," the brokerage has said.

Stock Outlook, Returns, ROE, 52 Week Low & high

 Given the target price of Rs 1,610 per share, the brokerage estimates potential gains of 33% from the current level. The stock's last traded share price on NSE is Rs 1,217.10 per share. Its market capitalization is 32,924.95 crore rupees.

 
It has given 0.58% negative return in a week, whereas, in 3 months, it gave an 18.67% negative return.  Over a year, the stock gave 19.76% negative return. It has given 8.17% positive return in the past 3 years. Whereas, in the past 5 years, it has given 11.68% positive returns.

The stock's ROE is 10.42%. The stock recorded its 52 week low level on 08 March 2022 at Rs 1,002 and the 52 week high on 09 November 2021 at Rs 1,696.40, respectively.

Disclaimer

The stocks have been picked from the brokerage report of Emkay Global. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.