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Proxy to cyclical rebound

SHTF outperformed on the back of sharper-than-anticipated improvement in asset quality and lower-than-expected provisions. SHTF is now also benefiting from a benign funding environment, which bodes well for growth and margins. We revise our FY21/22E earnings upwards by 8.5%/5.8% to reflect these tailwinds. SHTF increasingly appears to be well-poised to capture any uptick in the used vehicle financing space, which has strong links to the economic cycle. We maintain ADD (revised target price of Rs 1,355).

* Asset quality stabilising ahead of expectations: On a pro forma basis, GSIII dipped ~15bps sequentially to ~7.1% in tandem with a sustained improvement in collection efficiency (from 95% in September to 104% in December). SHTF also tweaked internal probabilities of default downwards, reflective of a relative improvement in its outlook. Further, the management estimate of the restructured portfolio remained benign at ~2%. In light of these trends, we now build exit-FY21E GNPAs of 9.5% (vs. 10.3% earlier).

* Provisions to moderate, faster than expected: Even as provisions remained elevated in 3Q at ~Rs 6.7bn (+51.8/2.9% YoY/QoQ), they were 12.7% below our estimates. In light of (1) faster-than-anticipated improvement in asset quality and (2) already-sizeable provisioning buffers (Stage III coverage40.8%, Stage I & II coverage- 4.8% and COVID-19 related provisions of 2.2%), we expect the pace of incremental provisions to moderate considerably. We now build LLPs of 2.7% in FY21E (vs. 2.8% earlier) and 2.1% over FY21-23E (vs. 2.2% earlier).

* Better access to funding to support growth and NIMs: Outstanding term loans grew ~10% QoQ. SHTF also saw reasonable traction in public deposits, which grew 18.6/10.5%. We believe the sharp fall in funding costs (-16bps QoQ) is indicative of an improvement in SHTF’s ability to access funds, supported by a benign funding environment. We raise our FY21E NIM estimates by 10bps to 7.2%. Further, these trends should allow SHTF to capture a larger share of the cyclical uptick in the demand for asset financing. We build in an AUM CAGR of 7.8% over FY21-23E.

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