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Healthy disbursements; NIM and credit costs surprise negatively

Elevated credit costs led to a large PAT miss; disbursements remain strong

* PAT declined by 77% QoQ and 47% YoY to INR1.7b in 1QFY22 (~71% miss). Credit cost was elevated at INR14.4b (~4.9% annualized).

* Reported NIM at 6.4% was impacted by higher interest expenses and excess liquidity on the Balance Sheet. Disbursements were strong (down 15% QoQ), albeit a little surprising, even in a COVID-disrupted quarter.

* Restructuring was minimal, with the total restructured pool contained ~72bp. It carries COVID-related provisions of INR28.5b (2.4% of AUM).

* Looking at its disbursement/collections trajectory, we estimate a strong FY22E, 10% AUM growth, and a RoA/RoE of ~1.8/11%. Management on the call mentioned that it has restarted evaluating the merger process within the group companies, which may be a near-term overhang till the final decision/scheme is announced. We maintain our Buy rating, with a TP of INR1,600/share at 1.5x FY23E P/BV.

Disbursements were unusually strong relative to peers; CE at 94% in Jun’21

* Disbursements fell 15% QoQ to INR127b, but must be viewed in the light of a very strong 4QFY21. AUM grew ~2% QoQ and 7% YoY to INR1.19t. Used CVs continued to be a focus area, while New Vehicle and Business Loans continued to be a drag on AUM growth.

* Collection efficiency (CE) stood at 92%/87%/94% in Apr’21/May’21/Jun’21. The repayment rate in 1QFY22 stood at 38% v/s ~45% in 4QFY21.

Deterioration in S2 and S3 was against minimal restructuring; S3 PCR up 210bp QoQ in 1QFY22

* Rather than restructure, SHTF thought it prudent to allow the GS2/GS3 to deteriorate by ~260bp/110bp QoQ to 14.5%/8.2%. It raised PCR on GS3 by ~210bp to 44.2%. Write-offs and termination losses stood at INR3.6b.

* SHTF made additional COVID-19 provisions of INR2.61b. A large part of this overlay was in the Passenger Vehicle segment. Total management overlay on account of COVID-19 stood at INR28.53b (~240bp of AUM).

* In 1QFY22, it restructured outstanding advances of INR3.43b (~30bp of AUM). The restructuring pipeline is not very high, and it may end up doing an additional INR3b in 2QFY22. Total restructured pool (including OTR 1.0 and 2.0) stood at INR8.56b (~72bp of AUM).

Excess liquidity impacts margin; reported NIM declines by 42bp QoQ to 6.4%

* The decline in reported NIM was weighed by: a) high liquidity (INR171b), and b) higher interest expenses because of some borrowings, which were booked at the fag-end of Mar’21.

* The management said it will bring down excess liquidity to three months of repayments by Dec'21 and this can significantly reduce the negative carry and improve margin.

Key highlights from the management commentary

* The collection trend in Jul'21 is better than Jun'21. The management expects rollbacks from Stage 2/3 in 2QFY22.

* It feels the pent-up demand is quite high and expects to benefit from the same in Aug-Sep'21 disbursements.

Valuation and view

Over the last three years, the company has diversified into newer sources of borrowing, such as retail NCDs and ECBs. The share of ECBs in total borrowings has increased meaningfully to 21% (from 13% six quarters back). It was also able to tap the debt market in the last four quarters. While demand was weak over the last two years, strong signs of a demand revival was seen in 2HFY21. We expect this to continue into FY22 as well. We now model in ~12% AUM CAGR for SHTF over FY21- 24E.

Despite elevated credit costs in 1Q, it has still guided for less than 2.5% credit costs in FY22. This has perhaps to do with the SRTO customer segment that largely deploys its vehicle in essential services. The company would have budgeted a very healthy CE trajectory in the coming quarters to give such guidance on credit costs.

We remain cautious of any newer COVID wave, which can derail this momentum and impact asset quality. We cut our FY22E/FY23E EPS estimate by ~25%/13% to factor in higher credit costs and a lower topline. We maintain our Buy rating, with a TP of INR1,600 per share at 1.5x FY23E P/BV.

Over the last three years, the company has diversified into newer sources of borrowing, such as retail NCDs and ECBs. The share of ECBs in total borrowings has increased meaningfully to 21% (from 13% six quarters back). It was also able to tap the debt markets in the last four quarters. While demand was weak over the last two years, strong sign of a demand revival was seen in 2HFY21 and we expect this to continue in FY22 as well. We now model an AUM CAGR of ~12% for SHTF over FY21- FY24E.

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