Buy Shriram Transport Finance Ltd For Target Rs. 1,750 - Emkay Global
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Outlier operationally; keeping an eye over asset quality
* SHTF posted a PAT of Rs1.7bn in Q1 (-77.5% qoq, -46.9% yoy), below our estimate of Rs6.3bn due to elevated provisions. Covid-specific provisions were maintained at Rs28.5bn (~2.4% of AUM), built in through elevated loss given defaults. With the normalization of economic activities and better collection efficiency, SHTF is better-placed to reach strong profitability, in our view.
* Our preference for SHTF is underpinned by its unique customer base with a moat and its focus on used vehicle financing. Despite Q1 being a lockdown quarter, used vehicle finance demand for the company remained healthy with disbursements of Rs127.3bn. AUM grew to Rs1.19tn (+6.8% yoy), with used vehicles’ share inching up to ~90.5%.
* Gross Stage 3 increased to ~8.18% from ~7.06% last quarter, while Net Stage 3 stood at ~4.74% with a PCR of ~44.2%. Considering SHTF caters mainly to low-income customers, this is a relatively better performance than its peers. With rise in LGDs, bucket movement would keep overall provisioning under pressure. We prefer to keep a close eye over asset quality trends in coming quarters. .
* Management is considering the merger of Shriram Capital, SHTF and SCUF to bring in cost synergies. This, we believe, may lead to some uncertainty. We roll forward to Sept’22E and raise TP from Rs1,630 to Rs1,750 (~1.6x P/Adj. Sept’23E Book). Maintain Buy on relative outperformance and attractive risk-reward.
What we like about Q1 results
* We like the CAR of ~23.3%, strong liquidity buffer of ~Rs104bn (~13.4% of AUM) and multiple sources of funding.
* On the growth front, used vehicle finance demand remained healthy and the company disbursed Rs127.3bn (+12x yoy, -15% qoq) despite Q1 being a lockdown quarter. Used vehicles continue to dominate, with fresh loan disbursements of Rs124.6bn (+12x yoy, - 12.3% qoq).
* Covid-specific provisions were maintained at Rs28.5bn, or ~2.4% of AUM. Collection efficiency in Apr’21/May’21/Jun’21 stood at 92%/87%/94%.
Where we remain concerned
* Management is considering the merger of Shriram Capital, SHTF and SCUF to bring in cost synergies. This, we believe, may result in some uncertainty.
* The cost of funds rose to ~9.56% from ~9.15% in Q4FY21 as SHTF continued with elevated borrowings to maintain liquidity. The overall cash balance remains fairly high at Rs160.2bn as of June-end.
* Due to elevated moratoriums, sluggish CV demand and a loaded MHCV portfolio (~46.1% of AUM), we believe growth and asset-quality risks will remain elevated in the near term.
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