Maintain ADD on Shriram Transport Finance - The ebb and flow continues - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities.

Shriram Transport Finance (Q4FY20): The ebb and flow continues… Maintain ADD
(TP Rs 825, CMP Rs 638, MCap Rs 145bn)

While AUM (~5% YoY growth) and PPOP (down 3.2%) trends were in line, PAT was much lower than estimates on a/c of higher provisions and SHTF's lower moratorium % vs. peer asset financiers surprised. We've reduced our earnings further to factor in (1) lower NIMs (persistent NIM pressure for the last few qtrs) , (2) potential flows from high GS-II to GS-III (even as GS-III has improved slightly) and (3) higher LLPs (conservatively) due to COVID-19 related uncertainties. We would watch for SHTF's performance on the liquidity and borrowing fronts as well as comments on the anticipated 3-way inter-group merger. We maintain ADD with a TP of Rs 825 (1.1x FY22E ABV). SHTF's unique business model and attractive valuations underpin our stance.

Borrowings and liquidity: Disclosures indicate that the co.'s liquidity buffers (excl. SLR investments), dipped ~45% between Mar-20 and May-20 to just ~Rs 57.2bn (5.2% of AUMs). Interestingly, SHTF applied for moratorium (2.0) on its domestic borrowings, despite the eligible borrowings forming just ~15.6% of its overall borrowings. While we do not find these trends particularly worrisome, one must note that SHTF appears to lag its peers on these fronts (liquidity and utilisation of moratorium). Overall borrowings grew 7.3/3.1%, slightly ahead of AUMs. Overseas borrowings (now 17.9% of borrowings) contributed almost entirely to this increase, growing ~40% QoQ. We will watch for the co.'s performance and commentary on this front.

Asset quality improves slightly: Surprisingly, SHTF not only sustained but also improved upon its 3Q asset quality performance, as GS-III dipped 2.3% QoQ to Rs 91.8bn (8.36%, -35bps QoQ). However, this features the benefit of the standstill classification of a/cs due to the moratorium. The mgt indicated that 60% of trucks financed had commenced operations by May-20, that it expected a further increase by Jun-20, and that borrowers in inter-state transportation were facing troubles. We expect GS-III to increase to 11% by FY21E, on a/c of COVID-19 related disruptions.

AUM growth at 5%, was in line with estimates. On a YoY basis, M&LCVs (+12%) and PVs (+5%) grew the fastest. Oddly, tractors (which form just 2.9% of AUMs) dipped 13/4.5%, on a/c of a greater focus on used tractors, while other financiers have seen healthy growth in (new) tractor financing. We expect AUM growth to remain tepid at ~3% over FY21-22E on a/c of muted credit demand.

COVID-19 related management commentary: 1) While SHTF has offered the moratorium option to 94% of customers (i.e. entire base, ex-willful defaulters), 23/52% of borrowers made repayments (incl. partial) in Apr/May-20. In value terms ~70%, of the book is under moratorium. 2) SHTF raised ~Rs 8bn from banks in Apr & May-20 and ~Rs 2bn under TLRO 2.0, and the co. intends to increase reliance on overseas borrowings and deposits. 3) Incremental cost of term borrowings is ~8.5-9%. 4) SHTF has to service ~Rs 80bn of debt over ~1HFY20. 5) Average LTVs ranged between 65-70% (at origination) on the used portfolio.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.637.8 as compared to the previous close of Rs. 635.45. The total number of shares traded during the day was 659809 in over 21276 trades.

The stock hit an intraday high of Rs. 675.75 and intraday low of 605. The net turnover during the day was Rs. 430406119.

Source : Equity Bulls

Keywords