SCUF’s weak Q1FY18 results indicates ongoing challenges faced by small businesses likely due to continued impact of demonetisation and its cautious stance on growth in the wake of GST implementation. Operating trends over the next 2-3 quarters are hence crucial. SCUF’s high coverage provides buffer against this backdrop. Overall performance remains weak even as stock performance will be determined by merger swap ratio with IDFC Bank. Retain Sell with target price of Rs 1,850. Large provisions pull down earnings: SCUF reported 19% growth in NII on the back of stable NIM and 17% growth in loans under management. However, earnings growth was weak at 7% y-o-y to Rs 1.93 bn due to large (47%) rise in credit costs. The company made large write-offs at 2.4% (annualised) of average AUMs (2.6% in Q4FY17), even as GNPLs inched up marginally (4%) q-o-q.
High provisions likely indicate that the operating ecosystem of the company remains weak. IS GST the next one? The bigger concern at this stage is the impact of GST implementation, i.e. ability of small traders/businesses (the primary borrowers of SCUF) to get onboard the new system. This is the likely reason for the company to go slow on new loans—disbursements in small business loans declined 2% y-o-y and 3% q-o-q.
High GNPLs in housing finance: Shriram Housing Finance’s GNPLs increased to 4.8% of loans from 2.6% in Q4FY17 and 4% in Q1FY17; while GNPLs typically rise in Q1, the rise seems to be high this year. The company has significantly slowed down disbursements (down 58% y-o-y). Near term uncertainty looms: We are tweaking up our estimates by 1-3% to factor in higher NIM as the benefit of falling interest rate continues. While we have liked the franchise of SCUF and believe it challenging to replicate, continued weakness in the business and lack of clarity on its trajectory is a concern.