Maintain ADD on Shriram Transport Finance - Valuation attractive despite asset quality concerns - HDFC Securities

Mr. Darpin Shah, Institutional Research Analyst, HDFC Securities

SHTF's 1Q earnings were below estimates due to higher-than-expected provisions, even as operating expenditure registered a sharp fall. The recent equity raise is a positive, and should improve SHTF's ability to raise debt too. Given the significant proportion of the book under moratorium (~47%), asset quality risks are likely to remain elevated and, consequently, we have increased our provision estimates. However, we maintain ADD with a target price of Rs 793 (1.1x FY22E ABV). SHTF's unique business model and attractive valuations underpin our stance.

1QFY21 highlights: NII dipped 5% QoQ and was slightly below estimates. PPOP (+1.5%) was cushioned by the sharp fall in operating costs (-29.4%) and was 3.9% ahead of estimates. PAT jumped 43.3% QoQ but was 36% below estimates due to elevated provisions.

Funding and liquidity: SHTF completed a Rs 14.9bn equity raise in August. As of 30th June, its CRAR was 18.9%. Borrowing growth was muted (5.1/0.9% YoY). Foreign borrowings (3.2% of total borrowings) were the largest incremental source of funds, growing 2x/+95.8%. SHTF's liquidity position was sequentially stable QoQ, with liquid assets constituting ~9.6% of borrowings. Performance on these fronts will be keenly watched.

Asset quality and moratorium: GS III (7.98%) dipped 2.7% QoQ, aided by the standstill classification benefit. 73% of customers representing 53% of SHTF's portfolio made repayments in June. This would imply that ~47% of SHTF's portfolio is under moratorium. Further, the management indicated that ~10% of the portfolio could be restructured. We expect asset quality to deteriorate, and we build GNPAs of ~11% in FY21E.

Provisions: Non-tax provisions dipped 5.7% QoQ to ~Rs 10.7bn but remained elevated (+89.7% YoY). SHTF made COVID-19 related provisions of Rs 9.6bn, taking the total stock of such provisions to ~Rs 18.7bn (1.7% of AUMs- this is creditable). GSIII coverage improved to 38.4%, while Stage I &II coverage rose to 3.7%. Nevertheless, we have increased our LLP estimates to 2.7% over FY21-22E.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.679.25 as compared to the previous close of Rs. 686.45. The total number of shares traded during the day was 250993 in over 8056 trades.

The stock hit an intraday high of Rs. 708.1 and intraday low of 675.95. The net turnover during the day was Rs. 173728063.

Source : Equity Bulls

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