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Stock pick of the week: Cut in corporate tax a good entry opportunity into Shriram City Union

The recent reduction in corporate tax is good news for Shriram City Union Finance. Its EPS for 2019-20 and 2020-21 are expected to go up by around 12%.

, ET Bureau|
Updated: Oct 07, 2019, 10.17 AM IST
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Analysts are getting bullish because of the fall in valuations.
Shriram City Union Finance (SCUF), the retail finance arm of the Shriram Group, corrected significantly in the recent past. For example, it fell 27% in the last six months, compared to just 2% fall each in Sensex and ET NBFC index. This underperformance reflects the market’s recent behaviour towards the mid cap non-banking finance companies (NBFCs).

Weak numbers for the first quarter of 2019-20 was another reason for this under-performance. For example, its loan growth during the first quarter was weak because of the weakness in the auto segment (disbursement down by 25% y-o-y) and MSME segment (disbursement down by 19% y-o-y). Since the weakness in the auto sector got aggravated in the second quarter, be ready for another quarter of weak numbers by SCUF.

However, vehicle demand is expected to pick up in the second half of 2019-20 because of better than average monsoon this year. This is expected to result in better farming in the kharif season and increase in rural income which might give a push to vehicle sales.

Analysts’ views
Sell 1
Hold 5
Buy 11

Though other segments like gold loans and personal loans are expected to remain firm in coming quarters, overall loan growth is expected to remain muted for 2019-20 because SCUF is also impacted by the ongoing system wide liquidity tightness. This is despite the fact that SCUF enjoys strong group reputation especially in South India and its high credit rating (AA from several rating agencies). As normalization of liquidity is taking longer than the expected, management has also reduced its AUM growth outlook for 2019-20 from 18% to 15%. However, SCUF will be able to return to high growth trajectory once the system liquidity situation improves because it has a high capital adequacy ratio of 22.6%.

The liquidity crisis has increased cost of funds and this may continue to put short-term pressure on its net interest margin (NIMs) in coming quarters. However, this short term pain is transitory. More importantly, recent price correction factors in most of the above mentioned negatives. Analysts are getting bullish on this counter now because of the fall in valuations. The situation is stable at the asset quality front and analysts are expecting gradual decline in its credit cost and write offs in coming quarters. The recent reduction in corporate tax is also good news for SCUF and its EPS for 2019-20 and 2020-21 are expected to go up by around 12% each.

24-1
SCUF compared with ET NBFC and Sensex. Stock price and index values normalised to a base of 100. Source: ETIG and Bloomberg.

Selection Methodology:
We pick up the stock that has shown maximum increase in “consensus analyst rating” in the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it. You can see similar consensus analyst rating changes during the last one week in ETW 50 table.

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