Backed by a strong network of chit fund customers, the firm has emerged a key player in the small enterprise and retail segments in the last 10 years

Small enterprises offer a big financing opportunity, with more than three-fourths of their funding needs usually met by themselves or through informal sources.

Non-banking finance companies such as Shriram City Union Finance have tapped into this segment with their superior risk assessment skills.

Customer base

Backed by a strong network of customers of the group’s chit fund (Shriram Chits), Shriram City has emerged a key player in financing the MSME (micro, small and medium enterprise) and retail segments in the last 10 years. Currently, about 90 per cent of its clients in the MSME segment are chit fund customers. The long (10-15 years) period of engagement with these customers has helped Shriram City assess their credit risk well.

About 50 per cent of Shriram City’s loan book comprises loans to small enterprises, which grew 18 per cent in 2013-14. More than 80 per cent of these loans are secured (against property), thus mitigating the risk. Small business loans are the key growth driver for the company. According to a report of the International Finance Corporation, the total debt finance requirement in the MSME sector is ₹26 lakh crore. Only 22 per cent of this is met through banks and other institutions.

The company has also built a healthy presence in the retail space, driven by the two-wheeler and gold loan segments. Given the stringent regulations for gold loans and the volatility in gold prices, Shriram City’s gold loan business shrank by 47 per cent in 2013-14 — its share in the total loan book falling from 30 per cent in 2012-13 to 17 per cent in 2013-14.

With tighter regulations for gold loans now in place, the company’s risk is lower, even if it were to increase the share of gold loans to the targeted 25 per cent, over the next two years.

Overall, the company’s loan book is expected to grow 20-25 per cent over the next two years.

Shriram City also started its home loan business through a subsidiary two years ago and has about ₹350 crore of assets in its second year of operations.

The company is well capitalised (Tier-I at 20 per cent) for its next leg of growth. At the current price of ₹1,392, the stock is trading at 1.9 times its one-year forward book value. This is at close to 26 per cent discount to players such as Mahindra and Mahindra Financial Services and Sundaram Finance. This offers investors with a long-term perspective a good opportunity to buy into the stock.

Healthy financials

On the back of healthy loan growth and margins, Shriram City is expected to increase its earnings by 20-25 per cent over the next two years. It was able to increase its margins in 2013-14 by about 80 basis points to 12 per cent, on the back of lower cost of funds and a shift in the loan mix to high-yielding loans. The company’s well diversified funding base, as well as a balanced mix between fixed (47 per cent) and floating rate (53 per cent) borrowings, should help sustain margins.

The company also managed its asset quality well. The gross non-performing assets (GNPA), which formed 2.1 per cent of loans last year, went up to 2.6 per cent in 2013-14.

But excluding gold loans, the GNPA as a percentage of total loans was up only marginally in 2013-14.

(This article was published on June 22, 2014)
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