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Visibility improves on double-digit growth, credit cost at <2.5%; merger of group entities to weigh

Shriram Transport Finance’s (SHTF) Q2FY22 earnings once again displayed resilience with improved visibility of double-digit growth and credit cost containment below 250bps. Customer segments, including individual and owner operators, and multipurpose/general utility potential of the used vehicles it finances, is supporting the momentum. Collection efficiency was back to 99.5% for Sep’21, cumulative restructuring was contained at <1%, stages-2&3 declined to 12.8% & 7.8% respectively, and credit cost was managed at 2.2%. Robust disbursements at Rs149bn (up 130% YoY and 17% QoQ) improves visibility on double-digit AUM growth by FY22-end. Operating performance was encouraging. However, the planned merger between group entities will cap rerating until clarity emerges on structure. Maintain HOLD.

* Stages-2&3 at 12.8% & 7.8% with coverage of 48.6% & 9.7% respectively; covid buffer at 2.3% of AUM: Gross stage-3 surprised positively moderating to 7.82% from 8.18%. Resilient stage-3 all through the pandemic can be attributed to: i) multipurpose/general utility potential of used vehicle it finances and transportation of goods to reach the last mile customers; ii) mostly individual and owner operator segments, which do not have much dependence on driver availability; and iii) focus on collections with staff personally visiting customer premises through pandemic time rather than relying on virtual calls. It has increased coverage on stage-3 to >48% in Q2FY22 from 42%/44% in FY21/Q1FY22. In absolute terms, incremental provisioning on stage-3 was Rs3.2bn. Stage-2 pool has also moderated to 12.79% (from 14.5% QoQ and closer to 11.9% in FY21); the company is maintaining 10% coverage on this pool. With improving trend in asset quality, it did not create further covid buffer keeping the cumulative buffer at Rs28.5bn, or 2.4% of AUMs. Management has guided to reduce stage-3 below 7% by FY22-end and net stage-3 below 4%. We are building in credit cost of 3.1%/2.4% for FY22E/FY23E.

* Collection efficiency at 99.5% (vs 91% in Q1); restructuring capped at <100bps: With aggressive focus on collections, collection efficiency improved to 98% / 99.5% / 99.5% for Jul / Aug /Sep’21 (vs 91% / 103% / 97.5% in Q1FY22 / Q4FY21 / Q3FY21). Company has been selective in extending restructuring and has adopted the approach of allowing stressed customers to flow into delinquency bucket. It implemented restructuring under OTR 2.0 of Rs2.4bn (in addition to the Rs3.7bn in Q1FY21). Under OTR 1.0, restructuring of Rs5.9bn was implemented. Hence, the cumulative restructuring pool was contained at less than 100bps.

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