SE Investments: Weak environment led to higher write-offs

SEIL's Q3FY13 results were in line with CRISIL Research's expectations. Consolidated disbursements grew 3% q-o-q leading to a 1% q-o-q increase in consolidated AUM. Higher contribution of high-yield income loans led to 1.3 ppt increase in average yields, driving 6% q-o-q growth in interest income. Interest expense declined 9% q-o-q on account of 5% q-o-q drop in borrowings. Cost-to-income ratio declined 8 ppt to 24.8% leading to a 17% q-o-q growth in pre-provision profits. The write-offs (as a percentage of AUM) increased from 1.4% (annualised) in Q2FY13 to 2.6% (annualised) in Q3FY13 in line with our expectations. Adjusted net profit increased 1% q-o-q to Rs 185 mn. We maintain our earnings estimates and fundamental grade of 2/5, indicating that its fundamentals are moderate relative to other listed securities in India.

Treading cautiously in a weak economic environment
While disbursements in the key segment business loans (to SMEs) increased 13% q-o-q, the loan book moved up only 1% q-o-q due to higher collections/repayments. SEIL has scaled down its loan book in the Mumbai region from Rs 2,177 mn as on March 31, 2012 to Rs 731 mn as on December 31, 2012 to effectively manage collections/bad debts. The management has indicated that it is cautious in lending and focus is on collections/recovery, thus curtailing its loan book growth.

New lines of credit will help improve fund availability
SEIL has received two new lines of credit totaling Rs 800 mn (15% of outstanding borrowings as on December 31, 2012). The management has indicated that they are in discussions with other banks for Rs 1 bn credit facility. The facility will help mitigate the impact of decline in assignments and improve availability of short-term credit with SEIL.

Monitorable: Impact of regulatory changes
SEIL currently writes off 180+ days past due (dpd) assets. Under the draft provisioning guidelines, NBFCs will need to gradually move to the 90+ dpd NPA recognition policy. As on December 31, 2012, 1.6% of SEIL's assets were 90+ dpd but the company can shift to stepwise provisioning for NPAs as against its current policy of writing off assets. If these guidelines are implemented, the impact on SEIL's profitability will be a monitorable. SEIL's CAR at ~36% (as on March 31, 2012) is comfortably above the requirement of 15% as per the new guidelines.

Fair value revised to Rs 240
We have rolled forward our valuation to FY15 resulting in an increase in the fair value to Rs 240 per share from Rs 209. At the current market price of Rs 387, our valuation grade is 1/5.

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