Shriram Transport Finance's Q1FY20 results (Upgrade to Outperformer) - In-line is good. Risk reward is favorable

Q1FY20 result highlights

• SHTF ‘s PAT of Rs6.3bn grew 11% yoy but declined 15% qoq. Earnings were in line with our estimate, with a beat on NII which was offset by higher provisions. After weak earnings from many companies in the BFSI segment, an in-line result without any provisioning shocks is a positive.
• AUMs grew 6% yoy and 2% qoq. Pre-owned vehicle loans grew 7% yoy, new vehicle loans declined 6% while working capital loans grew 53%.The yoy increase in working capital loans looks big but sequentially these loans have remained flat. The yoy jump is on account of fuel loans that were added in 2H last year. Disbursals grew 3% qoq but declined 8% yoy. Disbursals picked up only in the month of June post elections. STFC continues to be stringent on LTVs with incremental LTVs of 60-65%.
• NIM was broadly stable declining only 6bp qoq to 7.16%. NII grew 8% yoy and 3% qoq. NIM declined due to excess cash of Rs66bn. The company maintains a cash cushion (currently at 66bn) of two months of disbursals following the NBFC crisis.
• Operating expenses grew 3% yoy and 4% qoq. PPOP grew 10% yoy and 2% qoq.
• Credit costs inched up to 2.3% from 2.26% qoq. Asset quality was stable with the sequential rise in NPLs contained at 4%. GNPAs rose 15 bps qoq to 8.52%. PCR on stage 3 loans is at 32%. The company uses 5 years data for calculating LGD. The PD for stage1 is 5.9%, the PD for stage II is 17.11% while LGD is 33.64%. The ECL assumptions are reviewed once a year in March.
• Most of the incremental funding during the quarter came from ECBs and securitisation while term loans declined sharply.
• Management has guided to AUM growth of 15% for FY20 on the back of pick up in 2H from BS-VI sales. Mgmt does not see any big increase in credit cost and believes asset quality is manageable.
• The group is considering a merger through one of the two proposals 1) either merge all business into Shriram Capital (Hold Co) which will be the only listed entity or 2) merge all businesses into STFC. Nothing is finalized as of now but could be finalized in the next three months.

Valuation and view

We believe after the sharp price correction, weak business outlook and merger overhang have been fully priced in. We find the risk reward attractive and upgrade to Outperformer. We believe loan growth has bottomed out and concerns on funding are overdone given that STFC has a good liquidity buffer. We revise TP to Rs1200 (fair multiple of 1.3x) and upgrade to Outperformer.