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MOSL: SHRIRAM TRANSPORT FINANCE (Buy)-Annual Report Update-Growth decelerating-Higher write-offs drive lower stage 3%

Shriram Transport Finance | Annual Report Update: Growth decelerating; Higher write-offs drive lower stage 3%; Slippages remain elevated

(SHTF IN, Mkt Cap USD3.5b, CMP INR1043, TP INR1300, 25% Upside, Buy)

 

• Our analysis of Shriram Transport Finance's (SHTF) FY19 annual report indicates that the company has diversified its borrowing mix by raising INR100b from ECBs and retail NCDs (largely equal). But, these sources have been more expensive - the total landed cost of ECBs is ~10%, while that of retail NCDs is 9-10%. In addition, securitization deals have become dearer - the interest cost range of assets of 48-60 months maturity (which comprise half of total sell-downs) increased from 6.9-8.2% in FY18 to 8.3-10.4% in FY19.
• The annual report also provides several interesting disclosures on the asset quality front. After nearly doubling in FY18, slippages were largely stable YoY at INR66b in FY19. However, there has been a sharp increase in bad debt write-offs in FY19 - up 60% YoY to INR23.4b. Also, while Stage 3 assets (NPLs) have witnessed ~100bp improvement to 8.4% in FY19, it masks a deterioration in Stage 2 assets, which increased from 13% of total loans in FY17 to 18% in FY18 and 19% in FY19.
• Other key highlights: (a) SHTF has positive ALM with 38% (36%) of domestic loans + investments maturing in less than one year v/s 40% (38%) domestic liabilities (Borrowings + Deposits) in FY19 (FY18), (b) FY18 PAT upgraded by INR8.93b (+57%) on transition to Ind-AS from IGAAP, led by lower credit costs and additional revenue recognition, (c) Outstanding assets increased 16-17% for FY17/18 as the securitization pool needs to be recognized on the balance sheet, and (d) Network expansion remains healthy with 335/2,800+ branch and employee addition.
• With tight liquidity and calibrated disbursements, we expect AUM growth to pick up only in 2HFY20. Margins should remain largely stable. Asset quality trends will have to be closely monitored, and thus, credit costs in FY20. We have cut estimates by 10%+ for FY20-22 due to lower AUM growth and pressure on margins. Maintain Buy with a TP of INR1,300 (1.4x June 2021 BVPS).