Maintain ADD on Shriram Transport Finance - Asset quality concerns remain - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

SHTF's 2Q earnings were ahead of estimates on account of lower-than-expected provisions. The company witnessed a significant and sustained improvement in monthly collection efficiency (reaching ~95% in September). Despite this, we remain cautious on SHTF's asset quality and continue to build in a significant rise in GNPAs in FY21E. We have revised our earnings estimates slightly upwards as we now build in lower (vs. earlier) yet elevated provisions. We maintain ADD with a revised target price of Rs 880.

Asset quality and collection trends: SHTF witnessed a sustained improvement in collection efficiency metrics, with collection efficiency reaching ~95% in September. However, this included overdues. GS-III dipped 238/156bps YoY/QoQ to 6.4% (7.26% adjusted for the impact of the SC order). Interestingly GS-II was ~11.7%. ~2-2.5% of customers had not paid a single instalment since March. The management expects to restructure 2.5-3% of the portfolio comprising primarily of loans to taxi aggregators and passenger transport opertators. We continue to expect a sharp rise in GNPAs in FY21E to 10.3%.

Non-tax provisions dipped 38.4% sequentially to Rs 6.6bn. The company holds COVID-related provisions of Rs 22.8bn (~2% of AUMs - this is creditable) and the management indicated that it did not foresee the need to provide further on this front. Along with Stage III coverage of 44.9%, SHTF holds ~4% coverage on Stage I & II assets which, again, is creditable. We have reduced our credit cost estimates for FY21-23E to 2.3%.

Margins expanded 24bps QoQ to ~6.7% (reported), partially aided by the upfront recognition of Rs 680mn as income on an assignment transaction. They, however, remained depressed YoY (-53bps) on account the impact of high on-balance sheet liquidity and sticky CoF (~9.5%, +14/-9bps YoY).

Borrowings were flattish QoQ (+5.9% YoY), and growth trends were in tandem with those of AUM growth. SHTF mobilized ~Rs 72bn in the quarter (~Rs 40bn via securitisation and ~Rs 15bn via loans). The company raised Rs 20bn under the PCGS. We will watch out for performance on this front.

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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