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Earnings beat on strong disbursements and lower credit costs

* Shriram Transport Finance (SHTF) reported Q2FY23 earnings of Rs10.7bn (+10.5% QoQ/+38.3% YoY), much above consensus’ and our estimates, driven by lower than expected P&L credit costs. Disbursement growth was at 6.6% QoQ, led by a 30% sequential growth in the new-vehicles segment, on a low base. Overall AUM grew 3.5% QoQ/11.2% YoY; calculated NIM for the quarter declined 29bps QoQ to ~7.8% due to a 23-bps drop in yields. Incremental CoFs for Q2 were higher sequentially, with Management expecting CoFs to rise by 8-10bps in Q3. Cost-to-income increased by 194bps QoQ to ~23.5% as a result of the one-off sales-tax settlement of Rs650mn. PPOP was flat QoQ at ~Rs21.1bn, in line with our estimate. Asset quality improved QoQ, with GS3 and NS3 declining 7bps and 4bps to 6.93% and 3.48%, respectively. PCR remained flat at 51.6%. Credit costs declined 48bps QoQ to 2.02%. During the quarter, Company utilized Rs0.95bn of management overlays. The restructured book stood at Rs6.8bn (at 7.6bn in Q1FY23).

* Management guidance for FY23E AUM growth of 12% for SHTF and 15% for the merged entity remains unchanged. Margins are expected to remain stable for the year, with the rise in CoFs to be offset by utilization of excess liquidity on the balance sheet for debt buyback. Management has guided for H2FY23 utilization of Rs5bn-6bn from the outstanding overlay pool of Rs17.4bn.

* We retain our BUY rating, with an unchanged Sep-23E TP of Rs1,610/share, using the ‘excess return on equity (ERE)’ method for FY23E-24E RoE of ~14.4%, implying 1.2x Sep24E BVPS. Key downside risks: Merger integration risks and overhang of stake sale by investors.

* What we liked: Strong disbursement growth during H1FY23 augurs well for SHTF, for the entire year. We moderately increased our AUM growth forecasts, to account for the current growth trend. In-house collection and re-possession teams reduce the risk of regulatory censure related to such activities. Management does not plan to bid for IDBI Bank, thereby removing an overhang created by such media news flow.

* Earnings call KTAs: 1) On the merger, the NCLT order for the hearing that took place on 19-Oct-2022 is expected within a week. 2) New vehicle demand is buoyant and is expected to continue in the near term. 3) Conducted offshore bond buyback of US$256mn in August, for the Oct-22 and 2025 maturity bonds. Management has announced a bond buyback of US$250mn for the Jul-2023 bonds. 4) SHTF holds excess liquidity of Rs50-60bn, equivalent to ~6 months of outflow which is expected to gradually trend down to 3 months, 5) SHTF has increased lending rates by 25-30bps across the used-vehicle segment, and 6) Listing of Shriram Finance expected towards end-November.

* Change in estimates: We have trimmed our opex estimates, with Opex-to-avg. AUM for FY23E/24E/25E at 1.9%/1.8%/1.7% vs. 2%/1.9%/1.8% earlier, respectively. We raise our disbursement growth for FY23E to 14% vs. 13% earlier (Exhibit 3).

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