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Hold Shriram City Union Finance, target price Rs 728: Emkay Global

Emkay Global has given a hold rating to Shriram City Union Finance but lowered the target price to Rs 728 over 12 months.

The NBFC is significantly exposed to low-income self-employed borrowers in semi urban and rural areas through MSME/2-wheeler loans, which makes it relatively more vulnerable in the current circumstances compared to peers.


During the Covid-19 lockdown, Shriram City is expected to undergo consolidation with a selective lending framework to avoid elevated slippages in the future. The 2-wheeler lending book will be impacted by slowing discretionary consumption and extension of the lockdown.

The key risk to the brokerage call is a quick turnaround of the ongoing liquidity crisis. The stake sale by Piramal Enterprises also remains another overhang on the stock.

The share price of the company moved up by 2.45 per cent from its previous close of Rs 741.80. The last traded price is Rs 760. Incorporated in 1986, Shriram City Union Finance has a market cap of Rs 5104.17 crore.

Investment Rationale

The revised target price of Rs 728 (Rs 1,484 earlier) is based on ~0.6 times FY22E P/Adjusted Book (~0.9 times earlier).

Continued weakness in rural/semi-urban markets post Covid-19 will impact overall growth prospects of the company. In the wake of subdued consumption demand, growing rural distress and increasing competition, the company remains exposed to a risky customer profile on account of a large size of its rural book.

An elevated dependence on fixed-rate borrowings (68 per cent of total borrowing) and the company’s inability to raise lending rates may see NIMs fall by up to 100 bps to around 13 per cent by FY21E. The brokerage also built in a 3 per cent increase in credit costs per cent for FY21E due to slowing demand and a vulnerable customer profile.
The NBFC has been a low-geared entity with better ROAs and subdued RoEs, along with a consistent hangover of a probable merger with Shriram Transport Finance, will keep minority holders under pressure.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1570 crore, up .54 per cent from last quarter sales of Rs 1561.60 crore and up 3.87 per cent from last year's same quarter sales of Rs 1511.52 crore. The company reported net profit after tax of Rs 317.31 crore in the latest quarter.

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