Weekly Tactical Pick: Shriram Transport Finance

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Amid the crisis engulfing the non-banking financial company (NBFC) space in the aftermath of the Infrastructure Leasing & Financial Services (IL&FS) default, the Shriram Transport Finance Corporation (STFC) stock has underperformed (down 36 percent from its 52-week high in October last year).

In fact, in the quarter gone by (Q3 FY19), it reported subdued numbers. (Read | Shriram Transport Finance: Soft Q3 but outlook confident; valuations reasonable) The growth in assets under management (AUM) decelerated to 14 percent year-on-year from above 20 percent seen in the previous two quarters.

The management took a conscious decision to preserve its cash amid a challenging environment. It increased its lending rate and reduced the loan-to-value ratio that had put a brake on growth, especially for new commercial vehicles and business loans.

Notwithstanding, the increase in lending rates in more recent times, the increase in cost of funds resulted in a compression of net interest margin by 13 basis points YoY and 8 basis points sequentially to 7.44 percent. (100 bps=1 percentage point)

Festive demand was subdued and that also had an impact on recent performance.

Then why are we recommending the stock at this stage?

The management’s recent guidance is encouraging. It expects AUM to grow by 15-18 percent in FY19 (from 14 percent year-to-date), thereby pointing to acceleration in growth in Q4 FY19.

It is also quite confident of achieving 20 percent AUM growth in FY20 as it expects demand for commercial vehicles to bounceback on account of pre-buying ahead of implementation of Bharat Stage- VI. The increase in prices due to implementation of BS-VI should have a positive rub off on prices in the used vehicle market as well.

Activity level on the ground has improved since middle of January, after remaining subdued for a while, and this provides medium-term visibility for the business.

STFC has raised resources that should provide adequate support for near-term growth. It has a diversified borrowing profile and has not faced challenges with funding, although cost of funds have seen an increase.

Although markets have seen some slowdown, collection efficiency remains strong. Gross Stage 3 assets (non-performing assets) remains stable at 8.78 percent. Net Stage 3 assets stands at 5.86 percent, with provision coverage (provisions held against non-performing assets) hovering around 35 percent.

The entity remains well capitalised with Capital Adequacy Ratio at 19.72 percent.

In its February 7 monetary policy , the Reserve Bank of India (RBI) has completely removed uniform risk weightage on NBFCs. In the new framework, risk-weighs would be as per the ratings assigned by the accredited rating agencies, thereby benefiting larger well-run NBFCs like STFC.

The company is entering a seasonally strong period and liquidity in the balance sheet will clearly give it an advantage over competition. The medium term outlook is promising for this niche entity. The correction in the stock price has rendered valuations attractive at 1.6 times the estimated adjusted book for FY20.



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