MOSL: SHRIRAM TRANSPORT FINANCE (Buy)-Strong quarter-Growth surprises positively

Shriram Transport Finance: Strong quarter; Growth surprises positively

(SHTF IN, Mkt Cap USD5.0b, CMP INR1455, TP INR1750, 21% Upside, Buy)

• SHTF had a good 3QFY18. The quarter was marked by strong AUM growth, margin expansion and stable asset quality.
• This biggest positive surprise in the quarter was AUM growth of 18% YoY - the highest in over 15 quarters. This was driven by 17% YoY growth in used CV loans and 26% YoY growth in new CV loans. Going product-wise, growth was largely driven by the M&HCV segment (20%+), while growth in passenger cars & tractors was modest. Disbursement growth of 65% YoY was very strong, despite the low base.
• Yield on AUM compressed 25bp YoY to 13.97%. This is explained partly by core yield compression and partly due to higher share of off-BS assets. On the other hand, CoF was largely stable QoQ and down 50bp YoY - this drove 35bp YoY NIM expansion in the quarter.
• Asset quality improved marginally with GNPL ratio down 8bp sequentially to 7.98%. While our calculation suggests that write-offs remained elevated in the quarter, we await the final number from management. With a robust PCR of 71%, we are confident of a meaningful decline in credit costs FY19 onwards.
• For 9MFY18, RoE was 16% - we believe SHTF will generate 16-18% RoE in FY19/20 too on account of decline in cost of funds as well as credit costs.