Covid-19 impacts credit costs, operating efficiency intact
* After Q3FY20 earnings, we had upgraded SHTF to Buy from Hold (our first upgrade in NBFCs since the ILFS crisis), considering improving asset quality profile, easing liquidity and attractive valuations. However, Covid-19 has completely shuttered our thesis as lockdowns/moratorium impacted growth and asset quality momentum negatively.
* During Q4FY20, disbursements declined by 9.1% YoY (4.7% qoq), whereas AUM grew by 5% yoy (0.8% qoq) to Rs1097.5bn. The company reported a sharp surge in provisions by 114.7% yoy (181.3% qoq) to Rs11.3bn, including Covid-19-specific provisions of Rs9.1bn. On liquidity front, it is fine placed with Cash balance of Rs75bn as of March’20.
* The company managed to maintain its momentum in recoveries (part payments). On customer count terms, the company has collected from 84% of the borrowers in March, 23% in April and 52% in May, whereas in value terms ~68-70% of customers remain under the moratorium till May’20. We expect collection momentum to improve further.
* We continue to like SHTF, considering its unique customer base with a moat. Demand for used vehicle (especially in the rural economy) to remain benign during the current slowdown. Maintain Buy (OW in EAP), with a revised TP of Rs730 (Rs679 earlier) corresponding to ~1x P/Adjusted Book FY22E (0.9x earlier).
What we like about SHTF results
* With a systemic loan moratorium amid an almost three-month lockdown, we believe that adequate capital, diversified liabilities and cash buffers are crucial in such times. We like SHTF’s CAR of ~22%, strong liquidity buffer of ~Rs104bn (~9.5% of AUM) and multiple sources of funding.
* Asset quality remains stable – Gross Stage 3 eased to 8.36% against 8.71%, Net Stage 3 at 5.62% against 6.09% last quarter, coverage ratio further improved to 34.7%. However, improved trends may be attributable to asset classification standstill since Feb 29, 2020.
Where we remain concerned
* SHTF has reported a tepid operational performance, with ~3% yoy de-growth in operating profit at Rs14.7bn. NIMs witnessed a sharp dip at ~676bps against ~714bps last quarter due to elevated cost of funds during the quarter.
* The company has reported a sharp surge in provisions to Rs11.3bn, including Covid-19- specific provisions of Rs9.1bn. This appears to be high compared to peers.
* Given the elevated moratoriums, sluggish CV demand and a loaded MHCV portfolio (~46.1% of AUM), we believe that growth and asset quality risks will remain elevated for SHTF in the near term.
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