MOSL: SHRIRAM TRANSPORT FINANCE (Buy)-Better days ahead

​SHRIRAM TRANSPORT FINANCE: Better days ahead

(SHTF IN, Mkt Cap USD4.6b, CMP INR1267, TP INR1500, 18% Upside, Buy)

• We believe that Shriram Transport Finance (SHTF) is on the cusp of a strong earnings trajectory. Company-specific drivers (reduction in credit cost, C/I ratio), along with a recovery in the CV market, should lead to 30%+ earnings growth over FY17-20.
  
• Also, we reiterate our stance that SHTF will be a big beneficiary of CoF reduction due to a large share of high-cost legacy borrowings. Thus, contrary to investor fears of a margin contraction due to rapid migration toward lower-vintage vehicle financing, margins should actually remain steady or even improve, in our view.
  
• Asset quality has been stable on an apples-to-apples basis. Over the past several quarters, the GNPL ratio has ranged from 4-4.5% on a 180-dpd basis – similar to the levels seen in FY16 before the NPL migration. However, a key point here is that the NPL provision buffer has almost doubled from INR20b in 3QFY16 (prior to NPL migration) to INR35b (ex-CE provisions) in 2QFY18. Despite the NPL migration, SHTF has stuck with a PCR policy of 70%+, which impacted its earnings, in our view.
  
• Meanwhile, an analysis of write-offs (which we believe reflects the only credit loss to the company) suggests that asset quality has been rather stable over the past 3-4 years. Write-offs, as a percentage of two-year-lag average AUM, have been steady at 2.0-2.2%, suggesting that the rise in GNPLs is merely statutory and not economic.