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Fitch Revises Outlook on Shriram Transport Finance to Stable, Affirms at 'BB'

Posted On: 2021-09-16 13:15:15 (Time Zone: IST)

Fitch Ratings has revised the Outlook on India-based Shriram Transport Finance Company Limited's (STFC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) to Stable, from Negative, and has affirmed the ratings at 'BB'.

STFC's ratings reflect the company's longstanding franchise in used commercial-vehicle financing, experienced management, satisfactory execution record backed by established underwriting processes and risk controls, and improved loss-absorption buffers.

We have revised the Outlook to Stable as we believe STFC's credit profile is likely to remain resilient, despite lingering uncertainty in the macroeconomic outlook due to the Covid-19 pandemic. STFC's operating metrics have improved since the second half of fiscal year ended March 2021 (FY21) and it has maintained steady funding access, which we expect will be sustained. The company has strengthened its capital adequacy, liquidity and provisioning buffers over the past year, further improving its defences against credit impairment and refinancing risk.

STFC's high non-performing loan (NPL) ratio of 8.2% at end-June 2021 (FYE20: 8.5%) reflects its exposure to sub-prime borrowers who fall outside banks' typical customer base. The company adopts a more accommodative approach in recovering past-due loans, based on its experience that delinquent borrowers are often able to repay if allowed more time to do so. This, along with its largely secured loan book, explains its lower credit losses of around 2.7% of loans in FY21 (FY20: 2.5%) - which include pre-emptive provisions to cushion against pandemic-led uncertainties. Moreover, STFC's provision coverage ratio improved to 93% of NPLs in June 2021 (FYE20: 68%), forming a wider loss-absorption buffer against future impairment.

STFC's rural and semi-urban customer base underpins its high net interest margin. This, along with its moderate operating expense base, resulted in healthy pre-provisioning profitability to gross loans of around 5.6% in FY21 (FY20: 5.8%), helping to compensate for the higher impairment risk in its loan book. Fitch expects earnings to remain supported in the medium-term through sustained volume growth, careful margin and operating expense management and adequately contained credit costs.

STFC's leverage improved to 4.6x by end-June 2021, from 5.0x at end-March 2021 as STFC was able to raise a total of INR37.5 billion in equity capital since August 2020. This has strengthened its capital loss-absorption buffers against unexpected losses; its tier 1 capital adequacy ratio increasing to 21% by end-June 2021, from 18% at end-March 2020. Fitch expects little pressure on leverage in near term as internal capital generation should substantially be able to support STFC's loan growth targets.

STFC's longer-tenor asset portfolio is generally matched against its medium-term funding portfolio. Liquidity buffers have increased relative to a year ago, backed by enlarged holdings of unrestricted cash and liquid assets. We expect the company to pare this buffer back once it is more confident of the macroeconomic outlook. However, it is likely to keep its liquidity buffer commensurate with its rating to cover near-term debt maturities in case of a temporary liquidity squeeze. STFC has maintained adequate access to funding at competitive rates over the past year from diversified sources, including banks, mutual funds, public deposits, securitisation and offshore debt.

The ratings on STFC's medium-term note (MTN) programme and foreign-currency senior secured debt are at the same level as its Long-Term Foreign-Currency IDR, while the rupee denominated senior secured debt is rated at same level as its Long-Term Local-Currency IDR in accordance with Fitch's rating criteria.

Indian non-bank financial institution (NBFI) borrowings are typically secured and Fitch believes that non-payment of senior secured debt would best reflect an entity's uncured failure. NBFIs can issue unsecured debt in the overseas market, but such debt is likely to constitute a small portion of their funding and thus cannot be viewed as a primary financial obligation.

Shares of Shriram Transport Finance Co. Ltd., was last trading in BSE at Rs. 1366.9 as compared to the previous close of Rs. 1352.65. The total number of shares traded during the day was 34239 in over 1604 trades.

The stock hit an intraday high of Rs. 1379.1 and intraday low of 1342.5. The net turnover during the day was Rs. 46492458.

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