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Disbursement momentum sustains; asset quality stable

* PAT declined by 11% QoQ to INR9.65b (in line) in 1QFY23, driven by a sequentially higher credit costs of ~2.5% and a NIM decline of ~20bp QoQ.

* Price hikes in both New and Used CVs (led by the shift to BS-VI emission standards and higher steel prices) has continued to feed into higher ticket sizes and are aiding disbursements, which grew 31% YoY to ~INR117b.

* SHTF’s customers and products operate in a benign competitive landscape. It has the pricing power to pass on the higher incremental cost of borrowings to its customers. We estimate a compression of ~20bp in NIM over the next two years.

* We model an AUM CAGR of 11% over FY22-24, led by 11% CAGR in disbursements over the same period. We increase our FY23/FY24 EPS estimate by 6%/7% to factor in higher loan growth and lower OPEX. We estimate ~20% PAT CAGR over FY22-24, resulting in a RoA/RoE of 2.5%/13% over FY23/FY24.

* Concern around potential exits by investors (such as PIEL, Apax, TPG, and Sanlam) still remains an overhang on the stock. We like both the standalone businesses and believe that the merged entity will emerge stronger than the respective standalone entities. We maintain our Buy rating with a TP of INR1,690 per share (based on 1.4x FY24E BVPS).

Higher ticket sizes will continue to aid healthy disbursements

* AUM grew by ~3% QoQ and ~10% YoY to INR1.3t.

* Geopolitical events aside, it is difficult to predict when a sustained new CV upcycle will begin, but we feel it is around the corner. While higher ticket sizes have aided disbursements, we expect volume improvements from 2HFY23 onwards.

Asset quality stable; write-offs at a normalized run-rate

* GS3/NS3 declined by ~10bp/20bp QoQ to 7%/3.5%. PCR on Stage 3 improved by 160bp QoQ to ~52%.

* Restructured outstanding pool stood at INR7.6b (~60bp of AUM). The company utilized COVID-related provisions of ~INR2.2b in 1QFY23 and aggregate COVID-related provisions stood at INR18.4b (~1.4% of AUM).

* Write-offs stood ~INR4.8b (back to the normalized run-rate of INR4-5b)

Margin compression of ~20bp QoQ; excess liquidity to gradually decline

* The management said it will start to gradually reduce the excess liquidity on its Balance Sheet.

* We expect margin to stay stable in FY23, aided by its pricing power, lower increase in the cost of borrowings, and a reduction in the negative carry from excess liquidity.

Key highlights from the management commentary

* The management expects weighted average borrowing costs to rise by ~20bp in FY23.

* It does not foresee higher delinquencies due to higher inflation. Truck operators do not have to bear the cost of higher fuel prices as the same is passed on to the end-consumers through an increase in freight rates.

NCLT approval on the merger expected in another two months

* Liability-side challenges faced by the company (even before the COVID-19 pandemic broke out) have now receded.

* We maintain our Neutral rating on the announced merger as we neither see any significant synergies, nor can highlight any significant negatives.

* Technical reasons (of a potential supply overhang after the merger) aside, the merged entity will emerge stronger than the respective standalone businesses. We maintain our Buy rating.

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