Buy Shriram Transport Finance Ltd For Target Rs.1,680 - Emkay Global
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Steady growth momentum with improving trends in asset quality
* Our preference for SHTF in these uncertain times is underpinned by its unique customer base with a moat, along with strong underlying demand for used vehicle during current slowdown. SHTF reported robust growth in disbursements to Rs149.7bn (+19.5% qoq, +37.8% yoy), with ~95% of disbursements contributed by the used vehicle segment.
* The company posted a PAT of Rs7.54bn, aided by healthy margins (calc. NIMs of ~751bps), consistency in operating leverage (C/I ratio at ~23.8%) and steady credit costs (~249bps). Provision coverage improved further to ~42%, with declining trends in Gross Stage 3 at 7.06% vs. 7.11% in the last quarter.
* Covid-specific provisions were maintained at Rs25.9bn (~2.2% of AUM), built in through elevated loss, given default assumptions across buckets. SHTF witnessed further improvement in collection efficiency to ~103% in Q4FY21 from ~97.4% in Q3FY21. Total restructured book stands at Rs5,893mn (0.5% of AUM) as of Q4FY21.
* We are building in some stress on asset quality for FY22E due to recent lockdowns. We are introducing FY24 to our estimates as well. SHTF remains our top pick in NBFC coverage universe. We maintain Buy and OW in EAP, with a revised TP of Rs1,680 (Rs1,595 earlier), corresponding to 1.6x FY23E P/Adj. Book.
What we like about SHTF results
* On the growth front, used vehicle demand for SHTF remained robust with disbursement growth of 37.4% yoy (+16.4% qoq) to Rs14.2bn, while new and SME lending also witnessed a spark of ~45.5% yoy (+131.5% qoq). Overall AUM for the year inched up to Rs1.17tn (+6.8% yoy, +2% qoq), with old vehicles forming ~89.2% of AUM vs. ~85.6% last year.
* We like SHTF’s CAR of ~22.5% (after the Rs15bn rights issue), strong liquidity buffer of ~Rs 171.2bn (~14.6% of AUM) and multiple sources of funding.
* Cost of funds saw a consistent improvement to ~9.15% from 9.43% in the prior quarter, indicating sufficient availability of liquidity.
* Operating expense remained flat yoy, further supporting operating profit (PPoP) to grow by +9.6% yoy. Cost-to-income ratio stood at 21.96% in Q4FY21 vs. 25.44% in Q4FY20.
What we are concerned about
* The second Covid wave, followed by country-wide lockdowns, can hamper demand scenario and asset-quality outlook for the company
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