Buy Shriram Transport Finance Ltd For Target Rs.1,835 - Yes Securities
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‘In-line growth, decent reduction in PAR 30’
Our view
SHTF’s performance on growth and asset quality was in-line with our expectations, which were premised on the resilience shown by the franchise in the preceding quarters. Driven by sustained healthy demand and transaction velocity, company’s mainstay used vehicle portfolio grew by 3% qoq/13% yoy. New vehicle financing and other loan products witnessed significant contraction on sequential basis. Overall disbursements stood at Rs148bn, was higher 2.2x yoy but lower than Rs169bn done in Q4 FY21.
NIM was stable despite the 25bps improvement in funding cost due to prevalence of substantial liquidity on the BS (Rs210bn, 16% of TA). The co. has been carrying liquidity equivalent to 6 months of liability repayments v/s earlier policy of 3 months. Significant opex increase was driven by higher royalty cost. Asset quality improved with PAR 30 portfolio declining to 20.6% from 22.7% as of June. There was 10%/2% reduction in Stage-2/Stage-3 assets qoq in absolute terms. ECL coverage on Stage-3 portfolio was raised to 49% from 44%. Incremental restructuring was lower at Rs2.4bn v/s Rs3.7bn in Q1. Covid provisioning buffer was maintained at Rs28.5bn (<3% of on-BS loans). Total ECL provisions increased to Rs92bn, maintained at 7.6% of loan assets despite improvement in PAR 30 portfolio. Credit cost reverted to BAU run-rate of 2.2%.
Management expects disbursements volume to improve further (Q3 FY22 to be at Q4 FY21 level), AUM growth to be above 10% by year end, NIM to benefit from further reduction in CoF and dialing down of surplus liquidity, Gross/Net NPLs to moderate to sub 7%/4% and credit cost to remain benign. We estimate significant improvement in return ratios over FY22-24 with RoA/RoE reaching 2.7%/14%. Increasing buoyancy in used CV market should re-rate the stock from current valuation of 1.4x FY24 P/ABV. Re-initiation of the merger process with group cos. remains a risk to full-potential rerating.
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