Shriram Transport Finance's Q2FY19 results (Neutral) - A strong quarter, but the best is over
- STFC’s PAT of Rs6bn grew 23% yoy and 6% qoq and was higher than the consensus estimate of Rs5.8bn. The beat was on account of better than expected NIM.
- Disbursals grew 12% yoy and 3% qoq. AUM growth remained strong at 21% yoy and 3% qoq. The growth in new vehicles and business loans continues to outpace growth in used CVs. Used CV AUMs grew 15% yoy and 3% qoq. New CV AUMs grew 46% yoy and 5% qoq. Business loans and working capital loans grew much faster at 12% qoq (105% yoy) and 15% qoq (80% yoy). Proportion of non CV loans has grown to 5.4% from 4.8% qoq.
- NIM rose 8bps qoq to 8.52% which mgmt. attributes to change in vehicle mix in 2Q. More rural and business loans could have contributed to the NIM expansion. We and consensus had expected NIMs to fall. With strong AUM growth and higher NIMs, NII grew strongly at 25% yoy and 13% qoq.
- Stage 3 Loans under IND AS declined marginally qoq while NPLs under IND GAAP rose 4% qoq. IND GAAP captures only the on-book NPLs while IND AS captures even off-book NPLs. While on-book NPLs saw some increase qoq, quality of off-book NPLs declined leading to a marginal decline in overall stage 3 loans. ECL cover remained stable qoq at 34%. While stage 3 assets saw stable provisioning cover, the provisioning for stage 1+2 rose 16 bp qoq due to downgrade of loans from stage 1 to stage 2 which is typical in monsoon months according to mgmt. Rs33bn of loans were downgraded from stage 1 to stage 2.
- Due to this downgrade and Rs0.6bn provision on loans impacted by Kerala floods, credit cost moved up sharply qoq by 21%.
- Opex growth remained high at 29% yoy and 5% qoq on a low base and as STFC continues to add more branches and employees after a pull back last year.
Valuation and view
With rising rates, higher fuel prices, lack of clarity on axle norms and tight liquidity likely to impact profit in 2H, we believe the best is over for STFC. We cut our TP to Rs1200/1.5xPBV FY20E and maintain Neutral. Potential merger of STFC and SCUF remains an overhang.
Shriram Transport Finance is a public company domiciled in India. Co. provides finance for commercial vehicles, construction equipments and other loans. Co. also provides financial services viz., commercial vehicle financing business, consumer finance, life and general insurance, stock broking, chit funds and distribution of financial products such as life and general insurance products and units of mutual funds. Apart from these financial services, Co. is also in non-financial services business such as property development, engineering projects and information technology.
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