Shriram Transport Finance's Q3FY18 results (Outperformer) - Strong growth continues, management remains bullish on future growth

• SHTF announced strong earnings for 3Q18 with PAT of Rs4.96bn growing 43% yoy and 3% qoq. PAT was marginally (only 2%) below our estimates. While NII was stronger due to higher than expected AUM growth, opex was also much higher than expected. Strong AUM growth of 18% yoy and 5% qoq, stable NIMs at 7.48%, stable GNPA and stable provisioning cover of 71% are the key earnings highlights.
• Disbursements grew 65% yoy and 8% 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 39% qoq faster than 5% qoq for pre-owned vehicles.
• AUMs grew 18% yoy and 3% qoq. AUMs for pre-owned vehicles grew 16% yoy and 4% qoq while AUMs for new vehicles grew 27% yoy and 11% qoq. New vehicles account for 11% of total loans in 3Q versus 10% qoq. Rural AUMs continue to grow faster than urban AUMs. Rural AUMs grew 47% yoy while urban AUMs grew 8% yoy. Over the last one year, SHTF has added 164 rural branches against 52 urban branches. Rural AUMs account for 31% of total.
• Yield and cost remained stable sequentially. NIMs remained flat qoq at 7.48%. NII grew 21% yoy and 3% qoq.
• Opex was higher than expected at 32% yoy and 10% qoq. The yoy growth in opex can be explained by the large employee reduction last year and re-hiring this year. But the sequential growth in opex is also on the higher side. The cost to income ratio at 21.3% is higher than 20.3% qoq.
• Gross NPLs rose 5% qoq. Provisioning cover remains strong at 71%. Migration to 90 dpd will increase the GNPA ratio by 120bps and the provisioning cover will drop by 5-10%.

Valuation and view

SHTF’s earnings turned around from the lows of GST+ demonetization in 2Q and the growth momentum has been maintained in 3Q. Given the recovery in the CV cycle and strong performance over the last two quarters, we believe the stock will continue to outperform. Also, after shift to 90dpd in 4Q, credit cost will start declining in FY19. Mgmt. guided to strong growth, stable NIMs and lower credit cost for FY19E.  We raise TP to Rs1,600 based on 2.2x PBV FY20E.