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Buy Shriram Transport Finance Co. Ltd. For Target Rs.1,430

Strong visibility on growth and credit cost normalization – Retain BUY with 12m PT of Rs1430

SHTF delivered a robust quarter with encouraging signals on sustainable growth and credit cost. Disbursements matched last year’s performance in Q3, and the management is now confident about delivering 10%+ growth in FY22. On asset quality, the data on collection efficiency (normal for last three months), stage‐wise movements (not much change in Stage‐2 % over Q2) and restructuring (invoked 2% of book, actual to be lower) is assuaging, and thus the company believes that credit cost will remain within stated guidance in current year and move material lower next year. The company carries Covid‐related additional provisions (over ECL) of Rs25bn (2.2% of AUM).

Liquidity/ALM pressures have ebbed with SHTF being able to raise significant sums through dollar bonds and term loans in FY21 YTD, and the current liquidity buffer covers next six months of liability repayments and ALM is positive in all shorter buckets. We expect earnings to get a fillip from AUM growth acceleration, NIM normalization and reduction in credit cost over FY21‐23. Estimate RoA to improve 2.7‐2.8% and RoE to 14‐15%. Despite the sharp run‐up in recent months, the valuation is undemanding at 1.2x FY23 P/ABV. Retain BUY and raise price target to Rs1,430.    

Management Commentary

Key takeaways

* Collection was consistently good through Q3 ‐ Credit Cost was annualized 2.2%.  

* Credit Cost to be within 2.7‐2.8% guidance for FY21 – will move towards 2% in the longer term.

* Loan growth likely to be around 6% in FY21 – FY22 should be a double‐digit growth year – if growth is much stronger, than co. would look to raise equity capital.

* Observing no idling of the vehicle for few vehicle owners as well as for larger operators – no of days vehicle run at 22‐24 days a month, suggesting healthy vehicle utilization.

* Freight rates have gone up, taking care of fuel price increase.  

* Demand for used vehicles improving – used LCV prices 20% higher than last year while used MHCV pricing has been stable.  

* Raised Rs120bn fresh borrowings through various instruments – Rs100bn was raised in Q2.

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