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Relatively resilient performance; group entities’ merger to weigh on re-rating potential

Shriram Transport Finance’s (SHTF) Q1FY22 earnings reaffirm the resilience of multipurpose/general utility potential of used vehicle profile that it finances. This was demonstrated in 1) collection efficiency of 91% for Q1FY22 (vs 103% in Q4FY21 and better than peers), 2) robust disbursements at Rs127bn (down mere 15% YoY), and 3) cumulative restructuring of <80bps. As expected, stage-2/3 rose to 14.5%/8.2% (vs 11.9%/7.1% QoQ) with incremental stress being pronounced in (commercial) passenger segment.

Consequently, it increased coverage on stress buckets and elevated credit cost dragged earnings below our estimates. Expecting demand to bounce back in H2FY22, SHTF targets double digit AUM growth and <2% credit cost for Q4FY22. Relatively better operating performance was encouraging. However, planned merger between group entities will cap rerating beyond 1.3x FY23 book until clarity emerges on structure. We downgrade the stock to HOLD from Buy with revised target price of Rs1,445 (earlier: Rs1,568).

* Stage-2/3 at 14.5%/8.2% with coverage of 44%/10%; covid buffer at 2.4% of AUM: Gross stage-3 came in higher, in-line with our expectation from 7.1% to 8.2%. Given SHTF customer profile is more concentrated on essential services transportation (75-80% customers in this segment at least on one-way trip basis). Incremental stress has primarily flown from passenger commercial vehicle segment. Passenger vehicle is ~19% of its AUM of which private passenger (for individual transportation) segment would constitute 10% and commercial segment at 9%. In commercial transportation, most adversely affected segment (namely bus operators, tourist operators, cab aggregators) would form less than 3% of AUM.

It has increased coverage on stage-3 from 42% to >44% (passenger vehicle PD assumptions at 53%). In absolute term, incremental provisioning on stage-3 was Rs7.6bn. Stage-2 pool has also risen from 11.9% to 14.5% QoQ and is maintaining 10% coverage on this pool. The company created further covid buffer of Rs2.6bn taking cumulative buffer to Rs28.5bn – 2.4% of AUMs. Consequently, it created total provisions of Rs14.4bn (including write-offs of Rs3.2bn) suggesting credit cost of 4.9%. Management’s guidance of steady state average credit cost of 2% is deferred by 2-4 quarters due to covid disruption. Target of achieving it in Q4FY22 seems a bit aggressive. We are building in credit cost of 3.4%/2.5% for FY22E/FY23E.

* Collection efficiency at 91% (vs 103%; restructuring implemented sub-80bps): Collections for the month of Apr/May/Jun were 92%/87%/94% of the demand compared to 103% in Q4FY21 and 97.5% in Q3FY21. The company is cautious in extending restructuring and may allow stressed customers to flow into delinquency bucket. It has invoked restructuring under OTR 2.0 of Rs143bn of which Rs3.4bn has already been implemented. Under OTR 1.0, Rs5.9bn of restructuring was implemented from invoked pool of Rs22.67bn. So, cumulative restructuring implemented (OTR 1.0+ OTR 2.0) is less than 80bps.

* Disbursements down mere 15% QoQ, AUM grew 2% QoQ: Disbursements were significantly higher at Rs127bn, down mere 15%. Essential commodities segment constituted >75% of fleet movement (one-way) – this has supported overall demand sentiment. Also, 75-85% of disbursements are generally to existing customers. AUM grew 6.8% YoY/2% QoQ to Rs1.17trn – this was primarily led by 11% YoY/3.5% QoQ growth in used CVs. Improved demand was more pronounced in used vehicle segment. LCV retail prices have gone up 20-25%, passenger car requirement has also risen in similar proportion. Management believes that due to pent-up demand, post monsoon phase would be promising. The bounce back in disbursements will drive double-digit growth in AUM by the end of this fiscal. As of now, demand for only heavy vehicles seems sluggish and will take relatively more time to return.

* Merger of Shriram group entities on the cards: The management highlighted that Shriram Group has started evaluating optionalities for merger between group financing entities. The process shall kick-start within two quarters and more clarity would emerge regarding reorganisation structure etc. Currently, insurance entities of the group would be outside the scope of merger. The objective is to drive synergy at the group, company, customer and operational level.

Having customer base and network on one single platform will drive lot of synergies. There is less commonality amongst customers as of now but merger would provide a scope to up-sell/cross-sell business loans, 2-wheelers loans, vehicle loans and housing loans to overall customer base. The management also indicated that organisation structure would be simple and decentralised, granting independence to various financing entities. Overhang of merger will weigh on valuations of SHTF until further visibility or clarity emerges in group restructuring process.

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