Shriram City Union Finance: Small business brings big yields

More than half of the company’s credit goes to small enterprises, a lucrative segment

The vast financing needs of small businesses presents a large opportunity for banks and non-banking finance companies that cater to this segment.

Shriram City Union Finance, whose mainstay business is to finance small enterprises, has been witnessing consistent growth in this segment.

Thanks to the wide chit fund customer base under Shriram Chit Funds (part of the Shriram Group), the company has been able to lend to the high-yielding SME (small and medium enterprises) space.

About 53 per cent of Shriram City’s loan book comprises loans to small enterprises — the portfolio grew 19 per cent in 2014-15.

Since our buy recommendation last June, the stock gained 22 per cent, despite its fall in recent months.

Since May this year, the stock has lost 12 per cent and now trades at 2.2 times its one-year forward book value, at par with its five-year historical average and 30-40 per cent discount to players such as Sundaram Finance, Bajaj Finance and Cholamandalam Investment and Finance. Investors with a two to three-year horizon can buy the stock at current levels.

Strong customer base

Shifting its focus to the small loan segment (after the commercial vehicle financing business got merged with Shriram Transport Finance in 2004), the company has been able to mine its existing chit fund customer base for extending small business loans.

The financial track record of these customers has helped the company assess their credit profiles and identify risks better.

Shriram City has also made use of opportunities in the two-wheeler and gold loan segment to build its retail presence.

In 2014-15, the two-wheeler loan book went up by 16 per cent while gold loan portfolio recorded a 20 per cent growth.

The volatility in gold prices and regulatory headwinds in the segment had led to a sharp fall in the company’s gold loan business in 2013-14, which is now regaining traction. The recovery in the economy is likely to be gradual and should gather pace in 2016-17. Shriram City’s loan book is hence unlikely to scale up sharply in the current fiscal. From 14 per cent growth in 2014-15, the loan book is likely to grow by 17-18 per cent this fiscal.

However, given the company’s niche focus on the SME space and healthy presence in the two-wheeler space, growth is expected to accelerate in 2016-17, in tune with economic growth.

Stricter norms

Last year, the Reserve Bank of India came out with a slew of regulatory changes for non-banking financial companies (NBFCs) — tightening of the non performing asset (NPA) recognition norms was a significant change. Shriram City Union, which followed a 180-day norm — loans in which borrowers have defaulted on their payments for 180 days or more are classified as NPAs — will have to comply with the 90-day norm in a phased manner until March 2018.

Shriram City’s gross non-performing asset is 3 per cent of its loans, marginally higher than last year, owing to the stress in the system.

Conforming to the new norms may lead to volatility in earnings. However, the company’s high provision cover (78 per cent) should provide cushion to earnings overall.

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