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In‐line growth and asset quality performance but for the RBI circular impact

Our view

SHTF’s operating performance was healthy (7% PPOP beat), but earnings were depressed by the flow‐forward (Rs9.5bn) and the concomitant provisioning impact (Rs3.5bn) from RBI’s November circular. This impact for the co. came solely from the daily stamping requirement, as it was already complaint on the NPL upgrade method. Notably, the management chose to not utilize the additional/excess provisions held on the standard assets, to anchor net Stage 3 around the 4% mark. SHTF also raised PCR on the increased gross Stage 3 assets, which drove ~Rs2bn further provisions in the quarter. Without considering the RBI circular impact, there was a marginal reduction in PAR 30 on sequential basis (from 21% to 20%); reconciling with collection efficiency in Q3 FY22 being better than Q2 (101% v/s 99%). AUM growth was in‐line with expectations at 2.4% qoq/8.4% yoy, driven by consistent traction in used vehicle portfolio (up 3.4% qoq/14% yoy). NIM/NII growth improved to 6.7%/10% yoy on the back of ~40 bps decline in CoF. Marginally lower opex (both qoq and yoy) drove 11% qoq/15% yoy growth in PPOP.

Management expects a) AUM growth to be near double‐digit for FY22, b) correction in gross Stage 3 to around 7.5% by March, c) slight improvement is LGD assumptions in the upcoming review, d) further reduction in CoF, and e) BAU slippages/credit cost settling at lower/usual levels in a few quarters aided by sensitization and collection efforts with standard overdue customers.

In our latest note on SHTF covering the merger announcement, we had put rating under review consequent to transitory unclarity over implications/synergies of the merger and risks around the event itself going through (shareholders’ approval). As things would take a few quarters to clear out, we reinstate BUY rating on SHTF basis our view on stand‐alone franchise progression and considering that negative sentiments around the merger (lack of much synergy, supply from existing large shareholders, etc.) are significantly priced in. Stock trades at an undemanding valuation of 1.2x FY24 P/ABV. We see growth remaining firm in used vehicle portfolio and credit cost trajectory being cushioned by excess provisions on the standard assets.

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