Shriram Transport Finance - Customer and product niche favourable - ICICI Securities

Shriram Transport Finance's (SHTF) Q3FY21 earnings reaffirmed our optimistic stance on its potential to deliver relatively better operating performance than peers and exceed our expectations. What lends the much-needed confidence on asset quality trends are: 1) sharp improvement in collection efficiency (crossing >100% in December); 2) sequential decline in proforma stage-3 assets (unlike peers witnessing rise in stress); 3) stage-2 assets stable at 12%, restructuring contained at 2% of AUM; and 4) credit cost of 240bps (below pre-Covid levels). Doubling of disbursements QoQ reflects the advantage enjoyed by SHTF due to its niche customer (owner-operator) and product (used vehicle) profile. Taking into cognisance the improved visibility on growth and asset quality outlook, we increase our earnings estimates by 33%/25% for FY21E/FY22E and expect the stock to command valuations of 1.5x FY23E BV. Maintain BUY with a revised target price of Rs1,568 (earlier: Rs910). Key risks: 1) government's scrappage policy, and 2) merger of the group's financial entities.

- Collection trends surprised positively; restructuring within guided range: Collection efficiency (including overdues) has consistently improved MoM - Sep/Oct/Nov/Dec at 95 %/97%/97%/104% respectively of the demand. Given that December is seasonally strong due to harvest season, there is a possibility of some moderation but the overall trend remains encouraging. Compared to its portfolio restructuring guidance of 3%, the company finally invoked restructuring for customers accounting for Rs22.7bn (vs Rs30bn request received) and the benefit was primarily directed towards the passenger vehicle segment (cab aggregators, tourist operators, bus operators, etc).

- Sequential decline in stage-3 and stable stage-2 assets instills confidence: In contrast to the sequential rise in proforma stage-3 assets for other vehicle financing peers, SHTF managed it much better than anticipated (7.1%, down from 7.3% QoQ). It has provided adequately on these proforma slippages, which are now carrying coverage of 41.2%. Stage-2 assets were also steady at ~12% and only 9.6k customers have not paid any instalment since March (with exposure of Rs1.12bn equivalent to <10bps of AUM). Company created further Covid-related buffer of Rs2.2bn taking the cumulative buffer to Rs25bn, or 2.2% of AUMs. Consequently, credit cost settled at less than 240bps. Factoring-in the credit cost trends in 9MFY21 and expecting stage-3 assets to peak at 9% by FY22E, we reduce our FY21E credit cost estimate to 2.9% / 2.9% / 2.5% respectively for FY22E / FY23E.

- Disbursements double QoQ improving AUM growth visibility: Fleet utilisation and demand expectations were overwhelmingly reflected in the sequential two-fold rise in disbursements (also up >10% YoY). AUM grew 5.5% YoY / 1.1% QoQ to Rs1.15trn primarily led by 9% YoY / 3% QoQ growth in used CVs. The typical niche of operating in used vehicle financing, and that too concentrated in the owner-operator segment, played to SHTF's advantage in the current market conditions.

- Multipurpose/general utility potential of used vehicle profile that it finances and improved demand in owner-operator segment (with lower dependence on driver availability) that it caters to, has witnessed relatively higher utilisation levels. This has helped it gain and sustain relatively better momentum in collection trends. Despite increased traction over the past couple of months and returning to pre-Covid levels, growth is likely to be in single digit for FY21E. However, if economic activities rebound across the board and across geographies, there is scope for double-digit growth FY22 onwards.

- Ingredients in place for credit rating upgrade: In Q3FY21, the company raised Rs120bn of borrowings through various instruments at an incremental cost of 8.5-9.0% (and funding cost has since reduced by 20bps). Positive ALM (cumulative surplus in <1-year bucket of Rs85bn), debt/equity at 4.7x (post equity raise), tier-1 at 20.5% and conscious decision to hold on to excess liquidity buffer, coupled with sustained operating performance, should instill confidence amongst credit rating agencies for rating/outlook upgrade.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.1291.65 as compared to the previous close of Rs. 1111.35. The total number of shares traded during the day was 984128 in over 48484 trades.

The stock hit an intraday high of Rs. 1313 and intraday low of 1166.4. The net turnover during the day was Rs. 1247898545.

Source : Equity Bulls

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