Shriram Transport Finance Company's Q4FY19 results (Neutral) - Beat on PAT but miss on PPOP

Q4FY19 result highlights

• STFC’s PAT of Rs7.5bn grew 17% yoy but declined 22% qoq. While PPOP declined 6% yoy and was below our estimate by 7% due to slow loan growth and lower NIMs, tax write backs for prior period and provisioning reversal due to review of PD/LGD in 4Q  drove an 11% beat on PAT.
• Disbursal and AUM growth remained weak due to slower election spend, STFC consciously cutting down LTVs and weak OEM sales. Disbursals declined 25% yoy but grew 22% qoq. AUMs grew 9% yoy and 1% qoq 2% lower than our estimate. Pre-owned vehicles grew 8% yoy, new vehicles grew 5% yoy while working capital loans grew strongly at 61% yoy. Mgmt clarified that working capital loans which are mainly for tyre and fuel cannot be misused because the payment is made directly to the vendors. While STFC has cut down LTVs on vehicle loans, including fuel and tyre loans, LTVs would be higher.
• NIM fell 20bps qoq to 7.22% due to a higher cash cushion of Rs80bn. ECB raised during the quarter came at an all-in cost of 10.25% while the coupon was 5.7%. Interest income fell qoq in absolute terms because of higher cash on the balance sheet kept as a buffer against the liquidity shortage. Incremental cost of funds is 9.5% versus average cost of funds of 9% in 4Q.
• STFC added 197 branches however the employee count did not go up. Also employee expenses declined and opex remained flat. Most of the branch addition happened at the end of the quarter so these branches will be manned in FY20. With lower disbursals, incentive payouts were also lower leading to lower employee cost. PPOP declined 6% yoy and was 7% below estimate.
• GNPAs declined 7% qoq while stage 3 loans declined 5% qoq. ECL cover on stage 3 was 34% in 4Q versus 35% in 3Q. Provisioning cover on GNPAs remained high at 71%.  Gross credit cost in 4Q19 increased qoq from Rs6.3bn to Rs8.1bn in 4Q. However in 4Q19, STFC also reversed earlier provisions of 2.67bn due to a review of PD/LGD which happens in 4Q every year. As a result, net credit cost declined qoq to 2.1% from 2.4%. Mgmt expects credit cost to remain at 2% in FY20. The company had a tax write-back for earlier years of Rs11bn leading to a lower tax rate of 23% in 4Q.  For 4Q18, the bank’s credit cost under INDAS is significantly lower than under INDGAAP because of lower assumptions on LGDs and PDs in 4Q18 compared to 3Q18 which lead to a release of provisions.

Valuation and view

With weak OEM sales and rising cost of funds, we expect FY20 to be a challenging year. Likely merger of STFC and SCUF remains an overhang. Given cheap valuations we remain Neutral. Cut TP to Rs1,110 (1.2x PBV FY21)  on uncertain business outlook and merger overhang.