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Collection efforts and moratorium benefit yielding strong results

Sharp decline in slippage | healthy upgrades | decline in write-offs

Shriram Transport Finance (SHTF)’s Annual Report has surprised us positively with the internal details on asset quality. ECL provisioning remains healthy on the balance sheet, with 6.8% of total loans, including higher COVID-related management overlay of ~2.3%. The management remains confident about further improvement in disbursements, an accelerating digitalization process, and tackling the second wave fairly better. It is further strengthening its leadership position.

The company is fuelled by capital (especially after the recent equity raise of ~INR25b through QIP and preferential allotment to the promoter). It has a healthy Tier I ratio of 20%+ and net debt to equity of 3.8x. We tweak our estimates marginally to incorporate the recent capital raise and second wave impact. Reiterate Buy, with TP of INR1,750 (1.6x FY23E BVPS).

Slippage ratio declines and write-offs drop sharply

SHTF’s performance on asset quality, especially during a pandemic year, surprised us positively. In our view, this is driven by the moratorium benefit to a certain extent. The slippage ratio declined to 5% v/s 7–8.5% over the last three years. Slippage in absolute terms declined 30% YoY. Absolute slippage was at the lowest levels in the last four years. Even write-offs as a percentage of opening NPAs continued to trend downwards – they stood at 18% v/s 23%/26%/38% over the past three years. Write-offs in absolute terms declined 10% YoY. Two-thirds of write-offs were from to GS3 pool. Upgrades/ Recoveries remained range-bound at INR46–53b and stood at INR48b for FY21 – one-third the opening NPAs and additions for the year. The contractual amount of NPAs written off during the year, in which enforcement activity was yet to begin, stood at INR10.8b v/s INR14.5b a year ago.

Share of Gross Stage 1 loans remains above 80%

At the start of FY21, SHTF reported higher concerns over loan performance due to its cash collection business model and a DCO/SRTO kind of customer base. With steady improvement in collections (led by unlocking), CE improved sharply (3Q/4Q at 97.5%/103.3% of demand), reflected in the stage-wise movement of loans. The GS1 (less than 30dpd) loan share remained steady at 80.8% v/s 80.2% a year ago and was significantly better than 72.4% reported in FY19. This was owing to the combination of lower slippages from new underwriting and focus on upgrades from Stage 2/3 loans.

Reduction in NPAs led by recoveries and upgrades; ECL improves

The flow of loans from the opening Stage 1 bucket to Stage 2/3 continued to trend downwards, reaching 14% (v/s 15.4% a year ago and ~17% in FY18/19). Upgrades from Stage 2 opening to Stage 1 increased to 60–70% in FY20/FY21 v/s 20–40% in FY18/FY19. Upgrades from Stage 3 opening to Stage 1 increased to 20–24% in FY20/FY21 v/s ~12% in FY18/FY19. Importantly, the share of GS3 loans declined 140bp YoY to 7.1%.

The company restructured ~50bp of loans and provided ECGLS to ~70bp. ECL/EAD improved to 6.8% from 5.8%, with overall improvement in coverage across stages. PCR on Stage 3 loans increased to 42% from 35%. In our view, GNPA and restructured loans may increase moderately in FY22 due to the unavailability of the moratorium benefit amid the second wave.

Diversifying liability base further; focus on increasing share of foreign liabilities through ECB

SHTF utilized the opportunity to further diversify its liability base, and the share of foreign liabilities increased further to 20.6% v/s 17.9% a year ago and 6.3% in FY19. The share of deposits increased to 15.3% v/s 12.7% a year ago and 11–12% in FY18/FY19. The company raised USD500m (INR36.7b) and USD225m (INR16.3b) on 13th Jan and 31st March 2021, respectively, issued under the USD3b GMTN program at 4.4%. The bonds are listed on the Singapore Stock Exchange and are fully hedged. In FY20, the company raised USD250m/USD500m at an interest rate of 5.38%/5.1%.

Efficient ALM management

As of FY21 (FY20), SHTF had positive ALM with 35% (27%) of domestic loans + investments maturing in less than a year v/s 43% (33%) domestic liabilities (borrowings + deposits). A fifth of the liabilities / ~19% of assets are over three years’ duration. The company runs a very high positive ALM in the 1–3 year ALM bucket.

Valuation and view

Since the IL&FS crisis, the company has diversified into new borrowing sources, such as retail NCDs as well as ECBs, and increased reliance on deposits. The share of ECBs in the borrowing mix has increased meaningfully to 21% (from 13% five quarters ago). SHTF has also increased liquidity to 16% of borrowings. AUM growth has been weak for the past several quarters; however, signs of a sharp reversal are seen in its core segment of Used Vehicle Financing. SHTF has done a good job in reducing the GNPL ratio over the past year. With the sharp rise in input costs, prices of new CVs are likely to go up and should have a consequent impact on used CV pricing as well. This should aid disbursement growth as well as lead to lower LGDs. We have incorporated the recent capital raise in our estimates. Reiterate Buy, with Target Price of INR1,750 (1.6x FY23E BV).

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