Maintain ADD on Shriram Transport Finance - Proxy to cyclical rebound - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities

SHTF outperformed on the back of sharper-than-anticipated improvement in asset quality and lower-than-expected provisions. SHTF is now also benefiting from a benign funding environment, which bodes well for growth and margins. We revise our FY21/22E earnings upwards by 8.5%/5.8% to reflect these tailwinds. SHTF increasingly appears to be well-poised to capture any uptick in the used vehicle financing space, which has strong links to the economic cycle. We maintain ADD (revised target price of Rs 1,355).

Asset quality stabilising ahead of expectations: On a pro forma basis, GS- III dipped ~15bps sequentially to ~7.1% in tandem with a sustained improvement in collection efficiency (from 95% in September to 104% in December). SHTF also tweaked internal probabilities of default downwards, reflective of a relative improvement in its outlook. Further, the management estimate of the restructured portfolio remained benign at ~2%. In light of these trends, we now build exit-FY21E GNPAs of 9.5% (vs. 10.3% earlier).

Provisions to moderate, faster than expected: Even as provisions remained elevated in 3Q at ~Rs 6.7bn (+51.8/2.9% YoY/QoQ), they were 12.7% below our estimates. In light of (1) faster-than-anticipated improvement in asset quality and (2) already-sizeable provisioning buffers (Stage III coverage- 40.8%, Stage I & II coverage- 4.8% and COVID-19 related provisions of 2.2%), we expect the pace of incremental provisions to moderate considerably. We now build LLPs of 2.7% in FY21E (vs. 2.8% earlier) and 2.1% over FY21-23E (vs. 2.2% earlier).

Better access to funding to support growth and NIMs: Outstanding term loans grew ~10% QoQ. SHTF also saw reasonable traction in public deposits, which grew 18.6/10.5%. We believe the sharp fall in funding costs (-16bps QoQ) is indicative of an improvement in SHTF's ability to access funds, supported by a benign funding environment. We raise our FY21E NIM estimates by 10bps to 7.2%. Further, these trends should allow SHTF to capture a larger share of the cyclical uptick in the demand for asset financing. We build in an AUM CAGR of 7.8% over FY21-23E.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.1384.8 as compared to the previous close of Rs. 1419.75. The total number of shares traded during the day was 153806 in over 5641 trades.

The stock hit an intraday high of Rs. 1470.55 and intraday low of 1372.35. The net turnover during the day was Rs. 217882320.

Source : Equity Bulls

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