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Strong disbursement growth | Stable asset quality

* Shriram Transport (SHTF)’s 4QFY21 PAT grew 4% QoQ (+3.6x YoY on a low base) to INR7.5b (6% miss). Reported NIMs at 6.8% were impacted by excess liquidity on the BS and interest reversals. The company continues to carry COVID-related provisions of INR26b (v/s INR9b a year ago) – 2.2% of loans.

* In FY21, SHTF’s NII/PPOP/PAT came in largely flat on a YoY basis. SHTF reported ROA of 2% and ROE of 12%+. We expect FY22 to be a normalized year and the company to report RoA/RoE of ~2.5/14%. Maintain Buy, with TP of INR1,700/share at 1.6x FY23E P/BV.

Disbursements improve sharply, but AUM growth moderates

* Disbursements are up 19% QoQ / 38% YoY to INR150b. Overall AUM grew 2% QoQ /7% YoY to INR1.17t. Note that the drag on AUM growth stems from the New Vehicles and Business Loans segments – the Used Vehicle Financing segment grew 4% QoQ / 11% YoY to INR1.05t. Collection efficiency (CE) came in at ~103%. This resulted in a strong repayment rate of ~45% (opening AUM) v/s pre-COVID levels of ~43%. Stable asset quality; healthy collection efficiency

* The GS3 ratio remained stable at ~7.1%. The company shored up its ECL provisions related to COVID-19 by INR0.8b, taking the total buffer to INR26b. Interestingly, at 4.1%, SHTF carries the highest Stage 1 and 2 provisions in our Coverage Universe.

* Write-offs and termination losses for the quarter were back at pre-COVID levels of INR5.3b (~2% of annualized loans). Excess liquidity impacts margins; reported NIMs decline 8bp QoQ to 6.8%

* The decline in reported NIMs was weighed by a) higher liquidity (INR171b v/s INR134b QoQ) and b) interest reversals of ~INR36.5m. In our view, core NIMs, adjusted for these factors, will have been higher by 10–15bps. The management has guided to maintain liquidity at elevated levels (three months of lending) up to 1HFY22. Key highlights from management commentary

* AUM growth is likely to be 10–12% in FY22. CoF has declined 20bp to sub9%. This may further improve by ~20bp over the next quarter.

Valuation and view

Since the IL&FS crisis, the company has diversified into new borrowing sources, such as retail NCDs and ECBs. The share of ECBs in total borrowings has increased meaningfully to 21% (13% five quarters back). SHTF has also increased liquidity to 16% of borrowings.

AUM growth has been weak for the past several quarters; however, signs of a reversal are seen in its core segment of Used Vehicle Financing. SHTF has done a good job of reducing the GNPL ratio over the past year. We are cautious of the second wave of the pandemic and its impact on AUM growth. We cut our FY22E/FY23E EPS estimates by ~2% on the back of slow loan book growth and a lower topline. Maintain Buy, with TP of INR1,700 per share at 1.6x P/BV (FY23E).

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