Maintain ADD on Shriram Transport Finance Company - Cumulative stress on par with bellwether peer - HDFC Securities

Mr. Krishnan ASV, Institutional Research Analyst, HDFC Securities and Mr. Deepak Shinde, Institutional Research Analyst, HDFC Securities

Shriram Transport Finance (SHTF) disappointed our expectations largely on account of elevated provisioning (~5% of AUM, annualised) to shore up its GS-III PCR to 44% (FY21: 42%). Although the stressed pool (GS-II + GS-III) rose to 22% of loans (+375bps sequentially), largely on account of pandemic-led operational disruptions, the overall stressed portfolio now appears to be on par with that of bellwether vehicle financier CIFC. SHTF surprised positively on disbursements at INR 12.7bn (~104% of pre-COVID levels), almost entirely towards used CVs. With the current stock of provisions at 7.5% of AUM (FY21: 6.8%), we expect normalised provisioning from H2FY22 on the back of resumption of economic activity and improving collections and recoveries. Having raised growth capital during Q1FY22, SHTF is well placed to capture the cyclical turn in the used CV segment. Maintain ADD with a target price of INR 1,462 (1.5x Mar'23 ABVPS).

Muted P&L performance, CoF tailwinds yet to accrue: SHTF reported muted NII growth (+8% YoY), with subdued NIMs at 6.4% (Q4FY21: 6.8%). The benign funding environment is yet to reflect in cost of funds benefit for SHTF (~4bps decline on YoY basis). The rundown of surplus liquidity (~14% of AUM), combined with the repricing of liabilities, is likely to reflate margin by up to ~40bps. The company reported strong other income of INR 1.7bn (largely securitization-related), driving YoY PPOP growth of 12%.

Overall stress at par or better than peers; provisions to moderate: SHTF reported GS-II/GS-III at 14.5%/8.2% (FY21: 11.9%/7.1%) - the GS-II portfolio included a restructured loan book at ~0.8% of AUM. While the build-up of stress (+375bps) was less steep compared to its peers (CIFC/MMFS at+1,066bps/1,332 bps), the aggregate stress pool of SHTF now appears to be on par with CIFC (21%) and favourable compared to MMFS (35%). The company wrote off INR 3.6bn (1% annualised). SHTF shored up its GS-II/III provisioning to 10%/44% (Q4FY21: 9.7%/42%) with incremental surplus provisioning towards the PV segment, where the impairment is expected to be higher than the used CV segment. With build-up of provisioning buffer, we expect normalisation of credit costs, going forward, if the projected third wave of the pandemic is averted.

Disbursements surprise positively on the backlog: SHTF's disbursements during Q1FY22 were at INR 127.3bn (~104% of pre-COVID levels), driven primarily by sanctions from earlier quarters. While the HCV segment continues to remain sluggish, the management indicated pent-up demand in LCV and PV segments. We built in conservative AUM growth of 8.8/9.3% in FY22/23E, as we await sustainable signs of recovery in economic activity.

Shares of Shriram Transport Finance Co. Ltd., was last trading in BSE at Rs. 1375.95 as compared to the previous close of Rs. 1391.45. The total number of shares traded during the day was 171350 in over 9411 trades.

The stock hit an intraday high of Rs. 1428.55 and intraday low of 1336.6. The net turnover during the day was Rs. 235218282.

Source : Equity Bulls

Keywords