SHTF reported in line pre-provision operating profit, but higher provision led to profit miss in Q4. GNPA rose Q-o-Q broadly as expected. Demonetisation impact is fading, but upcoming GST implementation should weigh on CV credit demand in H1. We expect loan growth to improve in H2. Lower funding cost should support better NIM. We lift FY18-19E EPS by 4-7% and PT to Rs 995. Valuations appear reasonable, but near term trigger appears missing.
Shriram Transport (SHTF) reported Q4 PAT of Rs 1.49 billion (4%y-o-y) below our Rs 3.09 billion estimate. Pre-provision profit (PPOP) grew 6.4% y-o-y, but credit cost at 5.7% (3.89% Q3) was ahead of our 4.1% estimate.
AUM grew 8% y-o-y (ex. CE 10% y-o-y). Disbursal fell 17% y-o-y (30% q-o-q, new CV -39% y-o-y). SHTF expects loan to grow 12-15% in FY18. SHTF expects good Rabi crop harvest to drive used CV credit demand in H1 and construction/infra activity to drive CV loan demand in H2. SHTF is adding headcount (+18% q-o-q) to widen distribution and also boost loan growth.
It also plans to double its revenue share partners to 1000 in FY18 in order to gain share from the informal segment. SHTF reported Q4 NIM of 6.97% (-20bps q-o-q). NIM was hit by income reversal of Rs 400 million. SHTF expects lower funding costs to boost NIMs by 15-20bps in FY18. Q4 provision was Rs 9.1 billion (49% q-o-q) vs our Rs 6.5 billion estimated. GNPA (120 dpd) rose to 8.16% (Q3 6.6% 150 dpd). Shift to 120 dpd NPA norm (from 150dpd) pushed GNPA up by ~100 bps and led to additional provision of Rs 3.68 billion in Q4.
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Collections have improved in the last few months. SHTF has recovered 45% of dues pertaining to assets (Rs 4.5 billion) on which RBI dispensation was applied. Collection in CE segment remains steady. Management sees strong possibility of provision reversal in CE segment. Demonetisation has hit disbursal and asset quality at SHTF, but impact is fading faster than we expected. We trim our FY18-19E AUM estimates by 3%, but we also lift our near- and medium-term NIM estimates factoring lower funding cost.
SHTF is trading at 1.9x FY18E BV (2.3x ABV) vs avgerage of 1.7x FY1 BV. We revise our RI valuation based PT as factoring higher earnings and rollover to June 18 (March 18 earlier). Our new PT of Rs 995 implies 1.8x FY18E BV (2.3x ABV). Key risks: slowdown in CV, lower NIMs, higher GNPA.