MOSL: SHRIRAM TRANSPORT FINANCE (Buy)-Strong quarter-Reaping the benefits on cost of funds

​Shriram Transport Finance: Strong quarter; Reaping the benefits on cost of funds

(SHTF IN, Mkt Cap USD3.6b, CMP INR1018, TP INR1330, 31% Upside, Buy)

• Shriram Transport's (SHTF) 1QFY18 PAT of INR4.5b was largely in line with our estimate. Strong sequential AUM growth, continued decline in cost of funds and reduction in GNPL ratio (QoQ) were the key positives of the quarter.
• Disbursements have started to pick up post the subdued performance in 2HFY17. AUM growth of 3.6% QoQ is encouraging - we believe that if the economic scenario in 2HFY18 picks up, the company would be able to better its 12-15% AUM growth guidance.
• Calculated NIM on AUM expanded 60bp QoQ to 7.9%. CoF declined 34bp sequentially to 9.44%. This is in line with our fundamental thesis that SHTF will be the biggest beneficiary on CoF reduction among all NBFC peers due to a larger share of high-cost legacy borrowings. Also, yields moderated just 13bp YoY to 14.31%, allaying fears that yields will reduce drastically as the company moves toward financing more younger-vintage vehicles.
• GNPL ratio decreased 13bp QoQ to 8.03%. However, credit costs of INR4b were higher than the quarterly FY17 average of INR3.1b. If one were to normalize the quantum of write-offs, the GNPL ratio would have been flat sequentially. However, the PCR of 71% gives us enough comfort that credit costs will decline sharply over the next two years, despite migration to 90dpd.