1_SCUF_2Q15 RU

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Anand Rathi Shares and Stock Brokers Limited (hereinafter “ARSSBL”) is a full service brokerage and equities research firm and the views expressed therein are solelyARSSBL 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 witIndia and to no countries outside India. Disclosures and analyst certifications are present in Appendix.

Anand Rathi Research India Equities

India I Equities

Kaitav Shah+9122 6626 6545

[email protected]

Clyton Fernandes+9122 6626 6744

[email protected]

BFSI

Result Update

31 October 2014

Shriram City Union FinanceGrowth improves, higher spread; Buy

Key takeaways

AUM growth bottoms out; disbursements up. After four quarters ofdecrease in AUM, SCUF’s AUM increased 2.9% yoy in 2QFY15 (to

` 155.6bn). Lending shares of SME and two wheelers increased 320bps and90bps to 52% and 18%, yoy, respectively. Disbursements increased 16.7%yoy (8.1% qoq), driven by gold loans (up 54% yoy). Led by a sharper focus

on rural India, we expect 23% growth in AUM over FY14-17.Spread on the rise, productivity decreases. Reported gross spread hasincreased 160bps yoy, to 13.3%, on a higher yield on advances. Proportionof retail liabilities in the overall borrowing mix has improved 230bps yoy, to31%. Easing interest rates and increasing proportion of higher-yielding ruralSME finance could aid stable NIM of 12%+ over FY15-16. On continuousinvestment in its employees, cost-assets increased 110bps yoy, to 5.6%. Weexpect cost-assets to improve with the NBFC better leveraging itsinvestments in the present set-up.

High NPA coverage and capital adequacy. Gross NPA rose marginallyby 7% qoq. NPA coverage improved 180bps qoq to 80%, one of the bestamongst peers. We expect credit costs over FY15-16, at 2.7%, to remainelevated (3% in FY14). Post the recent capital infusion of ` 7.9bn in Jun’14,capital adequacy now stands at a high 30.44% with Tier 1 of 25.2%, and issufficient to support the NBFC’s healthy loan growth plans.

Our take. A strong rural-focused niche model, improving growth andhigher NIM would support +3.5% RoA over FY15-16. We maintain Buy. Atour target price, the stock will trade at 3.0x FY15e BV and 2.5x FY16e BV.Our target is based on the two-stage DDM (CoE: 16.0%; beta: 1.1; Rf:8.5%). Risks. Below-expected growth and higher NPA, change in RBInorms.

Rating:Buy Target Price: ` 1,903Share Price: ` 1,742

Key data SCUF IN / SHCU.BO52-week high / low ` 1,849 / ` 905

Sensex / Nifty 27723 / 82813-m average volume US$0.5mMarket cap ` 117bn / US$1.9bn Shares outstanding 65.9m

Shareholding pattern (%) Sep-14 Jun-14 3-Jun-14Promoters 33.8 33.8 33.8 - of which, Pledged - - -Free Float 66.2 66.2 66.2 - Foreign Institutions 24.8 23.5 23.7 - Domestic Institutions 2.4 2.9 3.0 - Public 39.0 39.8 39.5

Quarterly results (YE: Mar) 2QFY14 2QFY15 % yoy 1HFY14 1HFY15 % yoy

Net interest income ( ` m) 4,419 5,100 15.4 8,743 10,102 15.5Non-interest income ( ` m) 140 207 47.7 314 333 6.2

Operating expenses ( ` m) 1,759 2,150 22.2 3,487 4,172 19.6

Cost-to-income (%) 38.6 40.5 192bps 38.5 40.0 148bps

Pre-provisioning profit ( ` m) 2,800 3,157 12.8 5,569 6,262 12.4

Provisions ( ` m) 919 1,089 18.5 1,929 2,297 19.1

PBT ( ` m) 1,881 2,069 10.0 3,640 3,966 8.9

Tax ( ` m) 609 691 13.4 1,194 1,310 9.7

PAT( ` m) 1,272 1,378 8.3 2,446 2,655 8.5

EPS ( ` ) 21 21 (2.5) 44 45 1.5

Source: Company, Anand Rathi Research

Financials (YE: Mar) FY15e FY16e

Net interest income ( ` m) 20,542 24,198Net profit ( ` m) 6,474 7,864EPS ( ` ) 98 119Growth (%) 11.8 21.5PE (x) 17.2 14.2PABV (x) 2.8 2.4RoE (%) 18.1 17.1RoA (%) 3.5 3.5Dividend yield (%) 0.7 0.8Net NPA (%) 1.3 1.3Source: Anand Rathi Research

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31 October 2014 Shriram City Union Finance – Growth improves, higher spread; Buy

Anand Rathi Research 2

Quick Glance – Financials and Valuations

Fig 1 – Income statement ( m) Year-end: Mar FY13 FY14 FY15e FY16e FY17e

Net interest income 16,289 17,791 20,542 24,198 28,706NII growth (%) 47.6 9.2 15.5 17.8 18.6Non-interest inc 397 1,031 1,340 1,675 2,110Total income 16,686 18,822 21,882 25,873 30,817Total Inc growth (%) 48.2 12.8 16.3 18.2 19.1Op. expenses 6,189 7,182 8,452 9,862 11,501Operating profit 10,497 11,640 13,429 16,010 19,315Op profit growth (%) 49.4 10.9 15.4 19.2 20.6Provisions 3,840 3,842 3,723 4,220 4,957PBT 6,656 7,798 9,706 11,791 14,359Tax 2,160 2,587 3,232 3,926 4,781PAT 4,496 5,211 6,474 7,864 9,577PAT growth (%) 31.3 15.9 24.2 21.5 21.8FDEPS ( ` /share) 81.1 87.9 98.3 119.4 145.4DPS ( ` /share) 8.5 10.0 12.0 13.0 13.0Source: Company, Anand Rathi Research

Fig 2 – Balance sheet ( m) Year-end: Mar FY13 FY14 FY15e FY16e FY17eShare capital 554 593 659 659 659Reserves & surplus 21,580 28,390 41,769 48,632 57,207Borrowings 127,271 120,490 142,291 170,679 213,943Current liab. & prov. 13,935 14,359 18,354 23,430 30,154Minority Interest - - - - -Total liabilities 163,734 163,831 203,074 243,400 301,962

Advances 133,554 128,535 151,374 185,521 230,046Investments 730 6,276 7,531 9,037 10,844Cash & bank bal 21,775 24,729 39,019 42,662 53,655Fixed & other assets 5,988 4,292 5,151 6,181 7,417Total assets 163,734 163,831 203,074 243,400 301,962No. of shares (m) 55 59 66 66 66Borrowings growth (%) 32.3 (5.3) 18.1 20.0 25.3Advances growth (%) 24.6 (3.8) 17.8 22.6 24.0Source: Company, Anand Rathi Research

Fig 3 – Key ratiosYear-end: Mar FY13 FY14 FY15e FY16e FY17eNIM (%) 11.8 11.5 12.0 11.6 11.2

Other inc / total inc (%) 2.4 5.5 6.1 6.5 6.8Cost-income (%) 37.1 38.2 38.6 38.1 37.3Provision coverage (%) 63.3 62.0 64.6 64.3 61.1Dividend payout (%) 10.5 11.4 12.2 10.9 8.9Credit-deposit (%) 95.3 93.7 94.0 92.0 93.0Investment-deposit (%) - - - - -Gross NPA (%) 2.2 3.3 3.6 3.7 3.7Net NPA (%) 0.8 1.3 1.3 1.3 1.4BV ( ` ) 399.4 488.9 644.2 748.4 878.6Adj BV ( ` ) 379.9 470.6 624.3 723.4 844.9CAR (%) 17.5 16.0 15.5 16.5 16.5RoE (%) 22.8 20.4 18.1 17.1 17.9RoA (%) 3.1 3.2 3.5 3.5 3.5Dividend yield (%) 0.5 0.6 0.7 0.7 0.7Source: Company, Anand Rathi Research

Fig 4 – PE band

SCUF

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Source: Bloomberg, Anand Rathi Research

Fig 5 – Price-to-book band

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Source: Bloomberg, Anand Rathi Research

Fig 6 – SCUF vs. Bankex

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Source: Bloomberg

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Result highlightsFig 7 – 2QFY15 Results vs Expectations( m) 2QFY15 2QFY15e Var % 2QFY14 YoY % 1QFY15 QoQ %

Net interest income 5,100 5,101 (0.0) 4,419 15.4 5,001 2.0

Pre-provisioning profits 3,157 3,190 (1.0) 2,800 12.8 3,105 1.7PAT 1,378 1,407 (2.1) 1,272 8.3 1,277 7.9


Fig 8 – 2QFY15 results( m) 2QFY15 2QFY14 % Chg 1HFY15 1HFY14 % Chg

Net interest income 5,100 4,419 15.4 10,102 8,743 15.5

Non-interest income 207 140 47.7 333 314 6.2

Operating costs (%) 2,150 1,759 22.2 4,172 3,487 19.6

Pre-provisioning profits 3,157 2,800 12.8 6,262 5,569 12.4

PAT 1,378 1,272 8.3 2,655 2,446 8.5

2QFY15 2QFY14 YoY 1QFY15 QoQ

AUM 155,570 151,180 2.9 150,290 3.5

Borrowings 115,770 117,090 (1.1) 118,090 (2.0)

Disbursements 41,550 35,590 16.7 38,420 8.1

Gross NPA 4,155 3,200 29.8 3,860 7.6

Net NPA 830 850 (2.4) 840 (1.2)

Gross NPA % 2.9 2.5 43bps 2.9 2bps

Net NPA % 0.6 0.7 (7)bps 0.6 (5)bps

NPA coverage % 80.0 73.4 658bps 78.2 178bps

Capital adequacy % 30.4 23.3 718bps 29.2 120bps

Tier-1 % 25.2 18.3 684bps 24.0 118bps


Fig 9 – AUM growth bottoms out

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Fig 10 – Disbursement growth looking up

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Fig 11 – AUM mix: Rising business finance and two-wheeler loans

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- Auto Loans - Two wheeler Loans - Personal Loans - Loans against gold - SME Loans - Others

Source : Company

Fig 12 – Cost-income increasing

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Source : Company, Anand Rathi Research

Fig 13 – High NPA coverage

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Source: Company

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Financials We expect 21.5% loan growth over FY14-17e with 24.9% CAGR inearnings over the same period.

Fig 15 – Income StatementYear-end: Mar ( m) FY13 FY14 FY15e FY16e FY17e

Interest income 30,431 31,355 34,206 40,316 47,937Interest expended 14,142 13,564 13,665 16,118 19,231Net interest income 16,289 17,791 20,542 24,198 28,706Growth (%) 47.6 9.2 15.5 17.8 18.6Non-interest income 397 1,031 1,340 1,675 2,110Total income 16,686 18,822 21,882 25,873 30,817Non-interest income / total income (%) 2.4 5.5 6.1 6.5 6.8Operating expenses 6,433 7,477 8,452 9,862 11,501Employee expenses 2,239 2,708 3,141 3,706 4,373Other expenses 4,194 4,770 5,312 6,156 7,128

Pre-provisioning profit 10,253 11,345 13,429 16,010 19,315Growth (%) 49.4 10.9 15.4 19.2 20.6Provisions 3,840 3,842 3,723 4,220 4,957Profit before tax 6,412 7,503 9,706 11,791 14,359Taxes 2,160 2,587 3,232 3,926 4,781Tax rate (%) 33.7 34.5 33.3 33.3 33.3Profit after tax 4,252 4,916 6,474 7,864 9,577Growth (%) 31.3 15.9 24.2 21.5 21.8Number of shares (m) 55 59 66 66 66Earnings per share 81.1 87.9 98.3 119.4 145.4Source : Company, Anand Rathi Research

Fig 16 – Balance SheetYear-end: Mar ( m) FY13 FY14 FY15e FY16e FY17e

Share capital 554 593 659 659 659Reserves and surpluses 21,580 28,390 41,769 48,632 57,207Net worth 22,134 28,983 42,428 49,291 57,866Borrowings 127,271 120,490 142,291 170,679 213,943Other Liabilities & Provisions 13.935 14,359 18,354 23,430 30,154Minority interestTotal liabilities 163,734 163,831 203,074 243,400 301,962

Advances 133,554 128,535 151,374 185,521 230,046Investments 730 6,276 7,531 9,037 10,844

Cash & bank balances 21,775 24,729 39,019 42,662 53,655Fixed & other assets 5,988 4,292 5,151 6,181 7,417Total assets 163,734 163,831 203,074 243,400 301,962

Source : Company, Anand Rathi Research

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Appendix

Analyst CertificationThe 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 thecompensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the researchanalyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and ExchangeBoard of India (hereinafter “SEBI”) and the analysts’ compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and haveno bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companiesRating and Target Price History (as of 31 October 2014)

SCUF

8

12

3

45

6

7

200400600800

1,0001,2001,4001,6001,8002,000

J a n - 0 8

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Date RatingTP( )

Share Price( )

1 12-Dec-11 Buy 680 5122 30-Jul-12 Buy 837 7063 02-Nov-12 Hold 898 7784 31-Jan-13 Hold 1,161 1,0795 22-May-13 Hold 1,214 1,1266 29-Jul-13 Buy 1,184 9547 02-May-14 Buy 1,365 1,1838 30-Jul-14 Buy 1,903 1,687

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation basedupon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment bankingrevenues.Anand Rathi Ratings DefinitionsAnalysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as describedin the Ratings Table below:

Ratings GuideBuy Hold Sell

Large Caps (>US$1bn) >15% 5-15% <5%Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 31 October 2014) Buy Hold Sell

Anand Rathi Research stock coverage (182) 61% 27% 12%% who are investment banking clients 5% 0% 0%

Other DisclosuresThis 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 itsfunctioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as agroup 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 potentialconflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned inthe Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investorsshould 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, futuresor other derivatives related to such securities (hereinafter referred to as “Related Investments”). ARSSBL and/or Anand Rathi may trade for their own accounts asmarket 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 adifferent position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees mayhave 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, mayfrom time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicitinvestment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoeveron the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the othercompanies 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 situationand the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding theappropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand thatstatements 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 tomake 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 thateach security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange mayadversely affect the value, price or income of any security or related investments mentioned in this report.

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