Multiple impending levers expected to ensure strong AUM growth; NIMs likely to be resilient; a preferred name among CV financiers
We interacted with the management of Shriram Transport Finance (SHTF) to get an update on the business and understand the demand outlook. Management believes SHFT’s current size (25% market share in the used CV space) is no constraint to growth given the multiple impending levers — good monsoon, overloading norms, BS-VI transition and adequate inventory — which can expand the addressable market.
NIM is expected to remain resilient at 7.4-7.6% level, as SHTF has ability to pass on the increase to its rural/used CV customers. IND AS is likely to be applicable from Q1FY19 onwards, but is unlikely to have major impact on SHTF given that PCR is maintained at >70%. SHTF may look to raise capital after Q2FY19, but is fairly comfortable till tier-1 drops to 13-13.5% (14.2% in Q4FY18). Maintain Buy.
Summary of management comments
Growth: Better monsoon and shift to higher tonnage vehicles/BS-VI can drive 18% AUM growth in FY19.
Margin: Liabilities worth Rs 250-270 bn maturing in FY19 will get re-priced at a lower rate, given that MCLR of most banks is lower than SHTF’s average cost of borrowings, thereby aiding NIM.
Credit costs: Expect credit costs to decline from 3.5% in FY18 to 2.5-2.6% in FY19 and further to 2.2-2.3% in FY20.
GNPA: Expected to start coming off over next 2-3 quarters, in line with other CV financing players that transitioned to 90-dpd earlier. (SHTF has also absorbed the full impact of construction equipment portfolio of `5.3 bn which is mostly downgraded and adequately provided)
Maintain BUY with TP of Rs 1,850
We don’t expect any impact of rising rates on NIM due to re-pricing of high cost borrowings. Moreover, improved CV cycle, expectation of a normal monsoon along with expanding sales force and branch network provide comfort. Maintain our positive stance on CV financiers with SHTF being one of the preferred ideas. At CMP, the stock trades at 2.6x/2.3x FY19E/20E P/ABV of `565/652.
Multiple levers for strong AUM growth
SHTF’s AUM growth has revived over past few quarters due to a pick-up in demand for CVs. In our view, the strong growth momentum should sustain given the multiple impending levers. We believe SHTF is well poised to deliver 20% AUM CAGR over FY18-20e, while the management has conservatively guided for loan growth of 18% in FY19.