Shriram Transport Finance Company Ltd - Q2FY2020 Result Update: Angel Broking

For Q2FY2020, STFC has reported in-line numbers. For the quarter, PAT increased 25.6% yoy owing to tax benefit (Rs. 170cr), AUM growth continued to be moderate at 4% yoy vs. 6% in Q1FY2020 and 21% in Q2FY2019. Disbursement stood at Rs. 13,120cr (New Vehicle at Rs. 666cr & Used Vehicle at Rs. 12,282 cr).

AUM growth moderated; NIM stable: During the quarter, STFC reported AUM growth of 4% yoy, led by working capital (39% yoy on low base) and used vehicle loans (6% yoy), while AUM of new vehicles and business loans declined 14% yoy. The tractor AUM declined 16% yoy in 2QFY2020, However, MLCVs reported a 13% yoy growth. The largest contributor, HCVs (46% of the book) reported minuscule growth of 2% yoy. We believe subdued economic growth, delayed infra spending, and higher LTV impacted AUM growth. NIM remained stable at 8.16% (up 3bps qoq), as the company managed to pass the incremental higher costs to borrowers.

Moderate deterioration in asset quality; credit cost guidance maintained at 2%: Gross stage 3 increased marginally by 5%/declined 3% qoq /yoy primarily owing to heavy rain which impacted borrower's business. During the quarter credit cost jumped to 2.44% vs. 2.11% in Q1FY2020, however, Management has guided to bring down credit costs to below 2% in the next 1.5 years. We expect Gross stage 3 to improve gradually owing to (a) good monsoon to improve borrower's financials, (b) strengthening of collection team, (c) with implementation of BS VI collateral value of used vehicle will get stable/improve and consequently LGD would decline.

Outlook & Valuation: We expect STFC's AUM to grow at CAGR of 11% over FY2019-21E primarily owing to (1) post-election government to increase spending on infra project (macro recovery), and (2) pre-buying of CV before the BS VI and consequently improvement in pricing of older vehicles to improve asset quality. We expect STFC to report RoA/RoE of 3%/18.3% in FY2021E. At CMP, the stock is trading at 1.2x FY2021E ABV and 7x FY2021E EPS, which we believe is reasonable for a differentiated business model with return ratios. We recommend a BUY on the stock with a Target Price of Rs. 1,410.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.1141 as compared to the previous close of Rs. 1156. The total number of shares traded during the day was 13346 in over 550 trades.

The stock hit an intraday high of Rs. 1167.5 and intraday low of 1128.95. The net turnover during the day was Rs. 15216296.

Source : Equity Bulls

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