Shriram Transport Finance's Q4FY18 results (Outperformer) - Strong operating performance, but migration provisioning disappoints

Q4FY18 results highlights

• SHTF’s operating performance remained strong in 4Q18 with operating profit growing strongly at 37% yoy and 16% qoq, 9% higher than our forecast. However, because of higher than expected provisions that grew 50% yoy and 130% qoq, PAT of Rs1.4bn was significantly lower than expected. PAT declined 3% yoy and 71% qoq.
• SHTF migrated to 90 days past due in 4Q from 120 dpd. Migration provisions of Rs7.2bn were much higher than expected (see figure 1). SHTF’s board decided to maintain a high provisioning cover of 71% which is close to the IndAS requirement. The street had expected them to settle for a 60-65% provisioning cover following migration, like the other NBFCs
• Following the migration, GNPAs rose 21% qoq to 9.2% from 7.98%. However GNPAs on 180 dpd fell from 4.99% in 3Q to 3.98 % in 4Q indicating that core asset quality has improved, led by strong recoveries.
• Disbursements grew 44% yoy and 13% qoq. YoY growth looks strong because of demonetization last year. The focus should be on sequential growth which is also strong. Disbursements for new vehicles grew at a strong 37% qoq faster than 9% qoq for pre-owned vehicles. The strong growth in new vehicle financing is led by overloading constraints which can continue for a quarter more.
• AUMs grew 21% yoy and 6% qoq. AUMs for pre-owned vehicles grew 13% yoy and 4% qoq while AUMs for new vehicles grew 37% yoy and 14% qoq. AUMs for business loans account for 5% of total and grew strongly at 25% qoq.  Rural AUMs continue to grow faster than urban AUMs. Rural AUMs grew 49% yoy while urban AUMs grew 11% yoy. NIMs remained flat qoq at 7.5%. NII grew 30% yoy and 6% qoq. NIM remained stable despite higher NPLs as yield on loans improved.

Valuation and view

SHTF’s earnings turned around from the lows of GST+ demonetization in 2Q and the growth momentum has been maintained. Given the recovery in the CV cycle and strong operating performance, we believe the stock will continue to outperform.  There were concerns raised at the analyst meet on business loans and on the need to maintain 70% provisioning under IFRS. We believe SHTF’s strong earnings momentum will overpower these concerns. We raise TP to Rs1,960 as we increase our target multiple to 2.6x from 2.2x driven by the strong cyclical recovery.