MOSL: SHRIRAM TRANSPORT FINANCE (Buy)-Strong quarter-expect buoyancy going forward

​Shriram Transport Finance: Strong quarter; expect buoyancy going forward

(SHTF IN, Mkt Cap USD4.1b, CMP INR1197, TP INR1415, 18% Upside, Buy)

• SHTF had an excellent 2Q. Strong disbursement growth of 14% QoQ/26% YoY led to a 14% YoY increase in AUM for the quarter. Management is confident that AUM growth for FY18 will be at the upper end of its 12-15% guidance range. To capitalize on the growth opportunity, the company opened 73 more branches in 2QFY18 - the highest-ever new branch opening in the history of the company. Bulk of these branches were opened in rural areas (defined as areas with less than 0.1m population).
• A key highlight of the quarter: NIM on AUM (calculated) expanded 80bp YoY to 7.9% due to a decline in cost of funds by 100bp YoY to 9.4%.
• Asset quality was largely unchanged, with the GNPL ratio at 8.06%. Write-offs (calculated) in the quarter were INR3.9b, while overall credit costs were INR5.8b. Management is optimistic about achieving a 50-70bp reduction in credit cost to 230bp in FY19.
• Valuation and view: SHTF's return ratios are at cyclical lows, with decadal high credit cost and NPLs. However, credit costs over the past two years have been statutory, rather than economic, i.e., write-offs as % of AUM have been steady. Additionally, we believe margin compression fears are overplayed, as over the next few years, vintage vehicle sales of high ticket sizes will be proportionally higher. We increase our FY18-19 estimates by 1%/4% to factor in sturdy revenue growth. The stock trades at 2.1x/1.8x FY18/19E BV. Buy with a TP of INR1,415 (2x Sept 2019E BVPS).