Shriram Transport Finance's Q3FY20 results (Outperformer) - Beat on PAT, positive mgmt. commentary

Q3FY20 result highlights

• STFC posted in line operating performance but higher than expected PAT as credit costs were lower than expected. PAT of Rs8.8bn was higher than our and consensus estimate of Rs7.1bn and grew 38% yoy / 15% qoq. Gross stage 3 loans remained stable qoq while stage 2 loans (30-60 dpd) declined qoq. Improving asset quality in a weak macro is a key positive.  While operating performance was in line it was weak with subdued AUM growth and flat NII due to a weak CV cycle.
• AUMs grew 5% yoy and 1% qoq with pre-owned AUMs growing 8% yoy while AUMs for new vehicles declined 13% yoy. AUMs for HCVs grew 4%, for MCV/LCVs 14% while tractor AUMs declines sharply by 13%. Other AUMs (business loans and working capital) grew 4%. Within others, working capital AUM grew 33%. These are fuel loans which are gaining traction and are being offered at 30,000 outlets with a low duration of 1-15 days. Disbursements grew 19% yoy but declined qoq. Disbursement growth looks high on a yoy basis because of a low base. Over the last few quarters disbursements have remained in the range of Rs100-130bn. NIM remained broadly stable declining 5 bps qoq to 7.14%. NII grew 1% yoy and 1% qoq.
• Opex grew 18% yoy and 4% qoq. Other income rose sharply from Rs242m in 2q to Rs644m because STFC renegotiated fees for distributing Shriram General Insurance. The entire increase of Rs400m for 9 months was booked in 3q. PPOP grew 3% yoy and 1% qoq.
• Asset quality remained stable in a tough environment. Gross stage 3 loans were stable qoq at 8.7%. Stage 3 ECL cover also remained stable at 32.1%. Stage 3 was flat versus higher NPLs for competition because STFC finances used vehicles that are usually engaged in consumption or agri transportation where activity levels are good compared to low utilisation in industrial transportation which has hit other new CV financiers.
• Credit cost surprised positively declining 30% yoy and 33% qoq. In percentage terms, credit cost declined from 2.5% to 1.6% qoq. This is the lowest credit cost since 1QFY19 and the second lowest since 2QFY12. We had assumed credit cost to be similar to last quarter given the weak macro. The total write offs (for stage 3) during 3Q were Rs5.3bn versus Rs6.6bn qoq while the company wrote back Rs860m of stage 2 provisions resulting in net credit cost of Rs4.4bn. In 4q, STFC will review PD and LGD assumptions. Mgmt is confident that even after the review, credit cost for 4q will be in line with 9M level of 1.95% (credit cost for 3q was 1.6%).

Valuation and view

Not only did STFC report a beat on PAT but mgmt. commentary was also positive. Mgmt guided to low double digit AUM growth and credit cost below 2%. We believe growth has bottomed out and concerns on funding are overdone given that STFC has a good liquidity buffer. We revise TP to Rs1,300 and reiterate Outperformer. Risk reward is favourable given cheap valuations.