* Shriram Transport Finance’s (SHTF) Q2FY18 performance was above our as well as street estimates as growth momentum is improving gradually while NIMs and asset quality remained largely stable qoq
* AUMs grew 13.5% yoy (+5% qoq) to Rs854.6bn as disbursements grew strongly by 26% yoy (+14% qoq) to Rs123.8bn. Disbursements growth was mainly driven by 19% yoy growth in used vehicles, while disbursements in new vehicles expanded 34% qoq
* Calculated NIMs contracted marginally by 9bp qoq to 7.8%, as yields came under pressure due to higher share of new vehicles in the disbursements mix, while cost of funds remained stable qoq; Asset quality remained stable qoq with GNPLs at ~8%
* We maintain our earnings estimates and believe the 90-dpd transition will be the key asset quality monitorable going forward. With the proposed IDFC-Shriram group merger being called off, we reinstate our rating to HOLD with a TP of Rs1,250 (2x FY19E BV)
* Growth momentum picking up: Disbursements grew 14% qoq / 26% yoy to Rs124bn led by a 12.5% qoq jump in used vehicles disbursements. Notably, the growth in new vehicle disbursements was strong during the quarter at 34% qoq (albeit on a smaller base). Consequently, AUMs grew 13.5% yoy (+5% qoq) to Rs855bn. The management expects AUM growth to pick up in H2FY18 and will be driven by new CV, construction equipment, LCVs and used CV. For full year FY18, the management has maintained its AUM growth guidance of 12%-15%.
* Asset quality remains stable, 90-dpd transition will be key monitorable: Gross NPLs were largely stable qoq at ~8% levels under the 120-dpd NPL recognition regime. The sequential rise in GNPLs was at 4%. However, the annualized credit costs for the quarter stood elevated at 2.8% as bad loan write offs during the quarter came in at Rs3.6bn vs Rs3.5bn in Q1FY18. The provision coverage ratio remains healthy at above 70%+ levels. Going forward, the transition to the 90-dpd NPL recognition regime will be a key monitorable for asset quality.
* Margin pressures likely to emerge going forward: Calculated NIMs expanded by 61bp yoy (-9bp qoq) to 7.8% led by a sharp drop in the borrowing costs. The cost of funds fell sharply by over 100bp yoy (4bp qoq) led by 1) downward re-pricing of high cost retail liabilities, 2) shift of borrowing mix in favour of low cost wholesale borrowings and 3) increased securitization (~4% of AUMs securitized during Q2). However, going forward there could be some pressure on NIMs as the share of new vehicles rises in the incremental disbursements, mitigating benefits accruing from falling borrowing costs.
* Calling-off of proposed merger between IDFC-Shriram groups ends uncertainty: The Shriram and IDFC groups ended the discussions for the proposed merger between the two groups. This development ends the uncertainty for both the groups, which was also an overhang for SHTF as under the prosed merger the stock was proposed to be delisted. We believe this move comes as a big relief for SHTF shareholders, which has also reflected in the recent price movement of the stock.
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