Shriram Transport Finance - Margin of safety enhances with upgraded outlook - ICICI Securities

Shriram Transport Finance's (SHTF) Q2FY21 earnings more than doubled QoQ (albeit down 10% YoY) to Rs6.84bn, beating our expectations by a wide margin. September collection efficiency of 95%, <5% of customers not honoured even a single EMI and estimated restructuring of 3% enunciated by the management provide the much-needed confidence on the trends in credit cost print. Despite sub-3% credit cost guidance (given contingency buffer of 2% of AUM), we pen down our estimate at 3.3%/3.0% for FY21E/FY22E, respectively. The company has been maintaining adequate liquidity (10% of AUM), resorting to assignment (under PCGS scheme) and ECB borrowings as debt market spreads hover high. Credit rating upgrade (expected in couple of quarters) and consistent operating performance can allay the perceived overhang on liability front. With improved visibility on outlook and sharp upward revision in earnings, margin of safety at current valuations of 0.8x FY22 book, for a niche business is high. We maintain BUY with a revised TP of Rs910 (now assigning 1x book, earlier TP - Rs739).

- Collection efficiency trends and estimated restructuring impart confidence: Collection trends surprised positively, with post moratorium collection efficiency at 95% of the demanded dues in September. This, especially, in the backdrop of the last disclosed numbers of July collection efficiency at 73% (by customers) and 53% (by value). Penning down one-time restructuring estimate at 3% of its portfolio and <5% of customers not honouring even one installment is overwhelming - much better than what the street was anticipating. Despite improving trajectory, it created further buffer of Rs4.2bn (40bps) in Q2FY21 taking cumulative contingency provisioning to Rs228bn - 2% of AUM. Pro forma gross stage-3 assets (including standstill overdues following SC's direction) declined from 7.98% to 7.26%. However, flow from stage-2 assets of 11.65% into stage-3 will be key to watch out. We expect stage-3 assets to rise to 10.5% FY21E and credit cost to be 3.3%/3.0% in FY21E/FY22E, respectively.

- Already modest expectations on growth front: Given the slowdown in economic activity and disruption caused by the lockdown in many locations, fleet utilisation and demand expectations were underwhelming. Consequently, AUM growth was similar to Q1FY21 - 5% YoY and 1.4% QoQ to Rs1.13trn. Despite gained traction over the past couple of months and returning to pre-Covid levels in Q4FY21, growth is likely to be in single digit for FY21E. Mirroring underlying sales volume, new vehicle AUM declined 15% YoY more than offset by 7% growth in used vehicle AUM.

- Managing liabilities and containing credit cost will be integral: Spreads in debt market for SHTF are hovering high and reliance on market borrowings are down to 20%. Incrementally, in H1FY21, it has relied more on raising money through ECBs and securitisation. It resorted to Rs40bn of direct assignment (Rs20bn under PCGS) in this quarter booking income of Rs711mn towards the same. NIMs, thereby, improved 24bps QoQ to 6.66%. Liquidity buffer (10% of AUM), improving collections and expected credit rating upgrade should cheer debt subscribers and help the company bring down cost.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.689.7 as compared to the previous close of Rs. 698.75. The total number of shares traded during the day was 266053 in over 10440 trades.

The stock hit an intraday high of Rs. 730 and intraday low of 669.85. The net turnover during the day was Rs. 184761792.

Source : Equity Bulls

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