Analyst Corner: Retain ‘buy’ on Shriram Transport Finance, TP at Rs 900

By HSBC Global Research

Gradual recovery in demand seen as economy opens up; fresh disbursements to gain traction quarter on quarter. Collection efficiencies improve post-moratorium; potential stress confined to select few segments. Liquidity and capital position have gotten better; retain ‘buy’ with an unchanged target price (TP) of Rs 900.

We hosted Shriram Transport Finance’s (SHTF’s) management for investor meetings at our Virtual Financials Tour on September 29. Investor discussions mainly concerned two key areas, demand revival in a post-Covid-19 world and asset quality outcomes after the moratorium and potential stress in the portfolio. Gradual improvement in demand: The demand in used-vehicles segments is improving gradually, in line with the improvement in utilisation levels. Demand in the new commercial vehicle (CV) segment remains sluggish. Fresh disbursements in Q1 were affected by a combination of factors such as the nationwide lockdown, tight liquidity and closure of vehicle registration office — all these issues have been resolved and fresh disbursements should pick from Q2 onwards. SHTF is likely to achieve fresh disbursements of c90-100% of pre-Covid levels by Q4FY21.

Collection efficiencies improve post-moratorium. Collection efficiencies have improved with 90%+ customers paying currently vs 73% in July. In value terms, collections are c80%+ and should get better in the coming quarters.

Management believes that the one-time restructuring of loans could be lower than earlier estimates of 5-10% of loans as potential pockets of stress are limited to cab aggregator, passenger CV and construction equipment segments. In FY21, overall credit costs are likely to be contained at about the 3%-level, in the downside case scenario. Liquidity and margin situation: SHTF continues to hold excess liquidity on the balance sheet, which has hit net interest margins.

(NIMs). The negative carry has eaten away 40-50bp of NIMs. The impact of this should gradually reduce in the coming quarters as fresh business increases and the overhang of excess liquidity on the balance sheet starts reducing. Margin normalisation is expected by Q4FY21. Outlook: We retain our ‘buy’ with a TP of Rs900. SHTF has created adequate provision buffers for potential loan losses, which should help cushion any asset quality shocks. On growth, we expect the wait for an uptick in the CV demand cycle to get longer due to the economic slowdown caused by the lockdown. However, demand in the low-ticket used-vehicle segment (mainly used for last mile connectivity) could recover relatively faster than other segments, which would be positive for SHTF. Key downside risks: A prolonged slowdown in CV segment demand could hamper the growth outlook and tight liquidity situation could keep borrowing costs elevated and NIMs under pressure.