Motilal Oswal Reiterates Buy Rating On This Shriram Group Stock, Sees Robust 21% Gains

Motilal Oswal in its recent report has reiterates its a buy call on the stock of Shriram City Union Finance (SCUF) for a target price of Rs 2,220 per share. Investors with the given target price can anticipate potential gains of up to 21% from its current market price. SCUF is a leading NBFC of the Shriram group with a market capitalization of Rs 12,294.31 crore.

SCUF 2QFY23 PAT of INR3.5b (8% beat) grew 24% YoY. This was driven by healthy NII/PPoP growth of 28%/19% YoY and benign credit costs of 2.5%. 1HFY23 PAT grew ~41% YoY to ~INR7.4b, led by NII growth of ~30% YoY.

C/I ratio was elevated at ~44% in 2QFY23 (up ~60bp QoQ), driven by 39% YoY increase in Opex. The company guided that the same will reduce to ~38% over the next few years, driven by process efficiencies and digitization.

Stock Outlook & Returns

On NSE, the stock currently trading at Rs 1,843.25 per share. On March 08, 2022, the stock recorded its 52 week low at Rs 1,416.05 per share, the 52-week high of the stock, which was reached on November 30, 2021, is Rs 2,303.60 per share. 

 
The stock over the past 5 days has given 4.91% positive returns, whereas, in past 3 months it has given 6.92% negative returns. Over the past 1 year, the stock moved down 18.18%, giving a negative return. It has given 38.12% positive returns in 3 years. It gave a 14.16% negative return in the past 5 years.

Asset quality at its best over the last six years; PCR healthy at 46%

SCUF reported a further improvement in asset quality with GS3 declining ~20bp QoQ to 5.9% (without having to resort to elevated write-offs), while NS3 was stable QoQ at 3.3%. SCUF further utilized INR510m of COVID provisions. Post this, the total management overlay stood at ~INR2.9b (~80bp of AUM). "We estimate credit costs of ~2.6% in FY22, including gradual utilization of COVID provisions over the course of 2HFY23 and FY24," the brokerage has said.

Shriram Housing continues to strengthen

Shriram Housing (SHFL)'s AUM grew 54% YoY/13% QoQ to ~INR65.5b, while 2QFY23 disbursements grew 66% YoY to INR10.5b. GS3 declined to 1.5% (down 10bp QoQ) while NS3 was stable QoQ at 1.2%. The company guided that it estimates 1+ dpd to deteriorate by ~50-75bp to ~5% over the course of the next 12-18 months.

Confident of sustaining margins at current levels despite rising CoB

CoB increased ~40bp QoQ. Increase in proportion of personal loans (PL) in the product mix aided yields and margins expanded ~43bp QoQ to 13%.  Despite imminent rise in cost of borrowing over the next few quarters, the company sounded confident of its ability to reiterate NIM at its current levels of ~13%, aided by improved product mix of high yielding products. The company will not transmit the higher interest rates to the customers.

Growth momentum to sustain - reiterate BUY

Keeping the technical reasons (of a potential supply overhang) aside, the merged entity is expected to emerge stronger than the respective standalone businesses. "We have increased our FY23 PAT estimate by 7% to account for stronger AUM growth and higher margins. Given the visibility around loan growth/credit costs, we model a PAT CAGR of 24% over FY22-FY24E and an RoA/RoE of 3.4%/15.5% in FY24E. We reiterate our Buy rating on the stock," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. 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.