Shriram City Union Finance - Buy

Issue Information

After India Infoline Investment Services Limited (IIISL), it’s now time for Shriram City Union Finance, a listed entity with market cap of Rs 2759 crore, to raise funds up to Rs 750 crore through secured Non-convertible Debentures (NCDs) of face value Rs 1000. The issue opens on August 11, 2011, and closes on August 27, 2011. The NCDs will be listed on the NSE as well as the BSE. The funds raised will be used for various financing activities, like repayment of existing loans, capital expenditure and working capital requirement.

Shriram City Union Finance is promoted by Shriram Enterprise Holdings (36.20 per cent) and Shriram Retail Holdings (17.30 per cent). It is an NBFC, which is registered with the RBI. The company has various products in its portfolio, which includes product finance, vehicle loans, personal loans, loans against gold and loans to small enterprises.

• Product Finance, which comprises two-wheeler loans and loans for purchasing electrical appliances.
  
• Vehicle Loans, which provides loan facilities for existing and new, three and four wheelers.
  
• Personal Loans, which provides loans to various individuals who do not have easy access to banks in rural areas. It also caters the clients of the Shriram Group.
  
• Loan against Gold, for loans against jewellery and ornaments.
  
• Small and Enterprise Loans, extending to a large number of small and medium enterprises that depend on banks and NBFCs for their finances. The company claims that it has a dominant share in this segment.
  

The company has a majority of borrowings from banks in the form of term loan, cash credit and redeemable NCDs on a private placement basis. The company’s average cost of borrowing ranges from nine per cent to 12 per cent. It has diversified segments, where it lends in the range of 18 per cent to 24 per cent. The following table shows the duration and the yield which the company charges its customers:

Company’s Loan Book With Average Yield

From the table, we can see that the highest portion of loan disbursed by the company is against gold, which actually should be considered very well. Gold is considered as a risk-free asset class, and is the best thing that a company can hold in the form of collateral in this global economic turmoil. Small and medium enterprises are growing very fast, and as the company is a market leader in the segment, it should not face major hindrances in the coming years. However, product finance loans and vehicle loans could face some slowdown because of rising interest rates and the growth slowdown in the economy.

The financial performance has been robust. Its topline has increased from Rs 348 crore in 2007 to Rs 1320 in 2011, at a CAGR of 40 per cent, while its bottomline has increased from Rs 51 crore in 2007 to Rs 240 crore in 2011, a CAGR  of 47 per cent. As of 31st March, 2011, the company’s capital adequacy ratio is 20.53 per cent, which is maintained well above the RBI’s regulated standard of 12 per cent, and net NPAs as a percentage of Net Loan Assets is 0.43 per cent. Debt to Equity ratio post issue will increase from 6.05x to 6.66x.

Debentures have been rated as AA by Care and AA-/stable by CRISIL, which implies a high degree of safety for servicing their financial obligation and carrying very low credit risk. The company has included Call and Put option, which can be exercised at the end of 48 months. The ‘Call’ option means that the company can redeem the debentures at the end of 48 months, as they have a right to exercise, and the ‘Put’ option is just the reverse. Undoubtedly, the company is giving a better coupon rate than India Infoline Investment Services Limited (IIISL), but it could have similar kinds of options as provided by IIISL, i.e. giving the interest and the principal on redemption (2nd Option of IIISL), which results in better tax returns. In this case, individuals would be taxed as per their respective income tax slabs.  As the company is giving very attractive rate of return of 12.10 per cent for 60 months, investors must park a portion of their portfolio in this NCD.

Financial Highlights