Good questions. For me sustainability of quality growth for next 2-3 years is what I want to establish. Can it grow 20-25% CAGR for next 2-3 years??
As is my wont, I rarely opine on the very long term. The immediate next 2-3 years is very important for me, and probably I want a view from Management where do they see themselves 5 years from now? How confident are they about reaching there? What are the milestones on the way, and what are the challenges on the way?
In my book, except for mature established businesses, it is futile to think 10/20 years ahead. I have zero views on SCUF 5+ years from now, and I do not spend my time in worrying about what will happen beyond 5 years. We never had a 10+year view on Mayur, Astral, Ajanta, Poly Med, PI Industries, or Kaveri for that matter - they have to first prove themselves in the near to medium term - before they can even aspire to go on to the next level!! Same with SCUF - I need to see them walk the talk in the near to medium term.
If I can satisfy myself that 20-25% CAGR for next 2-3 years is a no-brainer for this business, thats usually good enough for me as a start. Then I will get on to comparing this business with other opportunities before me and take a call.
It will be useful to ask them a question put this way âHow do you assess the credit-worthiness of a micro business like say that of aTaxi Driver and a Road-side Tea/Snack vendorâ?
Thanks for another input for finer-grained questioning. We are progressing:)
PS: It is usually wrong to assume things about a business - just because the Management fails to articulate it a certain way. We maintain it is the SKILL of the analyst in extracting the most out of the interaction!!
1). Returns are probably going to be good. But what about Returns relative to Risk being taken? We havenât done enough diligence on the Risks - actually very little. {As a senior investor puts it, Returns alone cannot determine the quality of an investment process
2). Someone informed me -There were issues with their accounting of gains from securitization and assignment. They were not amortising such gains over tenure of loans. He believes they have corrected after RBIâs nudge. {Anil & Vinod MS - can you investigate this further}
3). SCUF has to come every year to the market for Fund raising -NCD, Bonds,CP, QIP, rights etc. Companies that need to do that)- have the incentive to keep numbers in good shape at all times. {Just making a point, not casting any aspersions}
4). We like companies with differentiated knowledge base. We havenât been able to find that SCUF possesses, or is building any.{The next round of finer-grained questioning should be able to establish that decisively - one way or the other}
Letâs focus more on these.
Any other thoughts on next-level/strategic questioning? Please help us with your continued inputs to do proper due diligence.
I was reading a book today called 'Indiaâs Money Monarchâs) and came across a nice lineâŚAlways respect the momentum (which is clearly against Banks right now). With the RBI and govt taking too many steps , and overhang of excess regulations, will it be a wise thing to invest here. This company has been on my radar for almost 6 months, and has still done nothing.
We have generally avoided the consensus - and made money. Not by being recklessly contrarian, but doing bottoms-up study while concentrating on the business, in recognising the merits of a quality emerging business -and being ahead of the curve - ahead of the consensus!
You have a point, stock has done nothing in 6 months and more. But that should hardly bother us. Letâs focus on establishing if it is a quality business - first.
âMomentumâ is a very interesting concept. In the short or medium term, personally I think, it is stupid to chase momentum. You will lose money once the music stops. But there are tectonic shifts in businesses (and thereby business momentum) which has long term structural changes. That is the type of opportunities where the greatest amount of money is made. For example, IT in the late 90s, the rise of Hero Honda and Maruti Suzuki, the rise of private banks, Indian Pharma. These are long term changes in the business momentum which creates winners out of industries on the whole.
So, take banking as an example. For the last 40-50 years, we have had PSU banks. They have a huge penetration and reach but questionable lending practices and corporate governance. All of which may not be their fault, but that discussion is not important here. What is important is that they is a continuous and increasing shift of customers from PSU banks to private ones. So, my bet is that 20-30 years down the line PSU banks may be the BSNL/MTNL of today, struggling for survival or a candidate for privatization. So, who wins in that kind of a scenario? HDFC Bank, ICICI Bank, Kotak, Axis, Yes Banks of this world definitely do. What about the Shriram Transports, Shriram City Union, Sundaram Finance, M&M Finances of the world? They are increasing in areas where the first set (the already established players) are not treading. So, the scope of opportunity is huge for all of these players.
Bottomline is, India is a country where cash is in short supply. Anybody who can provide cash will always have a good business. Anyone who follows prudential lending practices will create a great business. So, short term there may be challenges because of the overhang of interest rate hikes, but longer term, financial businesses are the best proxy for growth of an economy.
Because SCUF is lending to people with PAN Cards and most bank accounts⌠I am ASSUMING its not the carpenter, etc⌠I also dont think that carpenters & dhobis would be very willing to repay the loan, that might just bemy bias⌠Also these guys when they take up a big work/contract fund their expenses from the customer advances, they dont really need a loan. Also they wont really go for so much paper work. Also if it is a contract based loan, the repayment will be lumpsum and not spread across years. So the loans have to be to other businessesâŚ
The reason that banks generally avoid the MSMEs is quite different. The reasons are
1). If the loan is for machinery, they are generally overbilled.
2). The collateral is valued high than the Market Value. It is very easy to do that.
3). The books are easy to & generally cooked. It is v.easy for a small company to show fictious sales, purchases etcâŚ
The only reason a eastablished, book maintaining company takes a higher interest loan from a NBFC and not from a bank is because somethings wrong⌠My guess is in a bad wave the NPAs will rise dramatically⌠and more than 60% (13% in form of gold backed collateral) of loans to MSMEs we are in very risky watersâŚ
I just read this⌠so my above assumptions about businesses they lend to is quite wrong⌠but the essence might still be the sameâŚ
How well-placed is SCUF in MSME NBFC funding space? When do we see Banks/FIs addressing this space in an institutionalised way?
Banks are not very active in MSME funding where the Risks are higher. When they do fund they are mostly funding âManufacturingâ businesses unlike us where our share is more on the âServicesâ businesses.
I agree with Donald and Abhishek, and I personally feel CUB has good fundamentals, but what I am trying to ask is, should we ignore opportunity cost of money.
Asking this question as a learning thing. Not trying to make a statement
SCUF looks like a solid long term invesment candidate which can give good balance to oneâs export heavy portfolio (with Shilpa, Ajanta, PI, Mayur, IT companies etc) and will be a good play on rural/middle-lower class growth. If we believe economy will grow at more than 5% this one should be a good candidate.
FY15 E BVS is at Rs 600 conservatively. This assumes a 20-25% growth in disbursements which management is quite confident of. SCUF had some headwinds in AP which contributes 48% of the business, which is no more the case. Pend-up demand could drive high growth there with new governments in place in the 2 new states.
The BVS estimate should be more than 600 as margins are set to improve in FY15.
NIM will improve as CAR is at 26%, much higher equity fund means lower interest costs.
NPA provision for incremental disbursements will be at 180 days from previous 150 days. This will decrease provisions even when loan book grows.
Cost to income should also improve as 2014 was a dull year, so some operational leverage in fy15.
You have a 11-12% NIM business with adequate growth opportunities for the foreseeable future with high entry barriers in a difficult to do business. I consider home loan business of Repco/Gruh easier to do compared to SCUFâs small business loans. To understand this please read the management Q&A of both SCUF and MCS. âCollectionâ needs to be understood well to appreciate what these companies are doing.
Management quality is top notch, proven execution track record and more than adequately funded. Next 2-3 years this one looks like a very safe bet for 25% CAGR. Valuation can go upto 3-4 times book value
At FY15 Expected book value at more than Rs 600, isnât this still good at current levels of Rs 1400? And this is one place where you can allocate large amounts unlike an MCS.
G S Sundararajan, Md & Subhasri Sriram, Ed add the call:Highlights by Capital Mkt:
The company witnessed moderately good quarter in Q1FY2015.Change in calculation of depreciation method mainly led to increase in operating expenses.
The asset quality and credit cost for the non-gold loan portfolio was nearly steady in Q1FY2015.The GNPA in the gold-loan book increased to 3.08% at end June 2014 from 2.14% at end March 2014.
As per the company, the asset quality of gold loan portfolio has stabilized, while the Loan-to-Value (LTV) in the gold loan NPA book was higher at 90%.
The company remains focused on gold loan book, while proposes to raise its share in the overall loan book to 25% from existing 15%.
Meanwhile, the company expects 20-25% loan growth for non-gold loan portfolio for next two years.Disbursements were muted due to election period, while the company expects the disbursements to pick up going forward.
Regarding the change in tax guidelines on mutual funds, the company does not have any short term borrowing so do not expect any impact on cost of borrowings. However, the company losses the tax arbitrage benefits on investments worth Rs 180 crore in FMPs of mutual funds.
The company does not finance to farm and rural sector, so would not be impacted by any debt waiver, talks of which are currently going on in states of Andhra Pradesh and Telengana.
The average loan ticket size stood at Rs 10.2 lakh at end June 2014 compared to Rs 10.3 lakh at end March 2014.
The company focuses mainly on Self-employed in the Tier I and II locations, which accounts for 90% of the loan book, while builders and project finance accounted for the balance 10%.The yield on self-employed loan book stands at 13.5% to 15.5%, while that on builderâs book stands at 16-18%
I was going through your spreadsheet calculations.Can you please explain how did you calculate the spread?
I tired spending a couple of hours to calculate myself.I could not figure out because the numbers dont match.
Take for example,Dec 2013,th sales is Rs.796.24 crores, and your spread sheet says Income from operations is 21.19% which comes to Rs.167 crores.I could not find this number in anywhere in the quartelry results.
It would be great When you get a chance,if you please explain how you did this calculation.
I had a look at Shriramâs comparable and historicals. In last three years, they have been facing higher Gross NPAâs across top four segments. I agree that they do have some runway left in terms of expansion. However, high growth might have an impact of NPAs as most NBFCs saturate easily accessible and high credit quality customers first before going down the pyramid. Any thoughts?
Within NBFCâs, Shriram has second highest GNPAâs of 2.6% (FY14) after Shriram Transport (3.7%).The company also has significant attrition of 30% at Junior level of management, mostly on the ground people including sales and collections employees. This seems quite high compared to about 15-20% in Indian microfinance sector.
Subhasri Sriram, ED of the Co add the call.Highlights by Capital Mkt:
Assets under Management increased at an accelerated pace of 8% yoy to Rs 16177 crore at end December 2014, driven by 17% rise in small enterprise finance to Rs 8505 crore and 16% growth in two wheeler loans to Rs 2967 crore.
The gold loan portfolio also rose marginally by 1% to Rs 2791 crore after several quarters of de-growth. However, the auto and personal continued to decline at 18% to Rs 1914 crore at end December 2014.
The company proposes to improve the share of small enterprise finance in the total AUM to over 70% in the long term, while two-wheelers share is targeted to improve to 20%. The gold loans share is proposed to be reduced to below 10% in the long term.
The company intends to focus on loan products that build long-term relationships with the customers.The company did not conduct any fresh securitization deal in Q2FY2015, which account for 5.7% of the total AUM.Gross NPA rose to 3.02% at end December 2015 from 2.89% at end September 2014. GNPA in the non-gold portfolio increased by Rs 48 crore in Q3FY2015.
Shriram Housing Finance, a subsidiary of the company, expects to double its balance sheet in FY2015
**GS Sundararajan, MD and Subhasri Sriram, ED of the co add the call:Highlights by Capital Mkt:
**
As per the company, the macroeconomic environment has not changed significantly. Nevertheless, the company has posted a good performance in FY2015.The company has worked hard to bring back the gold loan book growth to 20% in FY2015.
Assets under Management (AUM) increased at an accelerated pace of 14% yoy to Rs 16717 crore at end March, driven by 19% rise in small enterprise finance to Rs 8872 crore and 16% growth in two wheeler loans to Rs 3021 crore.The gold loan growth spurted to 20% at Rs 2943 crore at end March 2015. The yield on gold loans stands at 15-18%.The auto and personal continued to decline at 12% to Rs 1881 crore at end March 2015.The disbursements improved 5% to Rs 4668 crore in Q4FY2015 and 11% to Rs 17202 crore in FY2015.
Company expects about 20% growth in the AUM for FY2016. Company is hopeful of achieving 20% growth in two-wheelers AUM. As per the company, about 65% of the two wheelers sales take place on cash basis. The opportunities at conversion of cash sales to loan sales would support the two-wheeler book growth of the company.
On gold loans business front, the company is in talk with bank to act as originator and portfolio manager.As per the company, the four-wheelers loans segment would be marginal in the long-term.The company conducted fresh securitization deals worth Rs 300 crore in Q4FY2015. The outstanding securitization balance stands at 5.81% of the total AUM at end March 2015.
Gross NPA rose to 3.12% at end March 2015 from 3.02% at end December 2014. GNPA in the non-gold portfolio increased to 3.31% at end march 2015 from 3.05% at end December 2014.The write-off stood at Rs 84.5 crore in Q4FY2015. The company does write-offs more than provisions, as provisioning does not have higher tax benefits.
GNPA including the write-offs stood at 3.64% at end March 2015.The GNPA of Rs 491 crore at end March 2015, consisted of Rs 200 crore from small enterprise finance, Rs 150 crore from two-wheelers, Rs 70 crore from gold, Rs 50 crore from auto and Rs 20 crore from personal loan segments.The company does not have major concerns about asset quality. However, the shift to 150 days overdue NPA recognition norms by end March 2016 would pressure asset quality and provisioning.
The company would be strictly following the RBI NPA recognition and provisioning norms deadlines.The borrowing of the company stood Rs 12402 crore at end March 2015. About 52.5% of the borrowings was at floating rates being offered to the company at banks base rates.
The staff count of the company increased to 25000 at end March 2015 from 20000 at end March 2015, which contributed to expenses growth. However, the staff count was steady in Q4FY2015, while incentives payment contributed to expenses growth in the quarter.
The capital adequacy ratio was healthy at 29.5% with the Tier I ratio at 25.32% at end March 2015.The company expects to have sustained dividend policy for next 3-4 years.On branch expansion front, the company is looking at the eastern region.The company do not have any plans to reduce lending rates, currently. The bottomlines are expected to grow 15% in FY2016, factoring in 20% growth in the AUM.
**Subsidiary performance
**
Shriram Housing Finance, a subsidiary of the company, operating from 62 branches has posted strong 130% AUM growth in FY2015. The company fully utilized the equity capital, while initiating borrowings for lending purpose from FY2015.The loan ticket size for the company stands at 10-11 lakh, while about 80% of the customer are self-employed.The GNPA of the Shriram Housing Finance stood at 2.05% at end March 2015. The company aims to reduce the GNPA to 1%-1.5%.
