70% fall in profits but analysts are still bullish on Shriram Transport Finance shares; here’s why

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Published: June 15, 2020 1:03 PM

For a non-banking finance company that has 68% of its customers, in value terms, under the moratorium, and has reported a 70% fall in profits on-year, a bear market such as the present one would not have been an ideal place.

Shriram Transport Finance told investors that the firm did not seek moratorium from lenders and made all liability repayments in the first moratorium period ending May 31, as it had sufficient liquidity at the end of March.

For a non-banking finance company that has 68% of its customers, in value terms, under the moratorium, and has reported a 70% fall in profits on-year, a bear market such as the present one would not have been an ideal place. However, Shriram Transport Finance, despite a weak March quarter performance is currently a favourite of analysts on Dalal Street. Expectations are so high that the stock is being pegged to even have an upside of 50% from current levels. Shriram Transport Finance is considered as one of the better-placed firms among non-bank lenders and the partial-recoveries it made during March through May might as well help it survive.

Net interest income of Shriram transport Finance was getting better since the last quarter of financial year 2019, recovering gradually only to fall in the March quarter of the last fiscal year. Although the fall in profits is largely due to a sharp spike in provisions that were at Rs 11,287 crore, the 2.6% on-year fall in operating profits is a cause of worry. Shriram Transport Finance collected money from 84% of its customers in March. The number came down to 23% in April before surging 52% in May. Interestingly, when foreign investors were leaving Indian capital markets, Foreign Institutional Investors (FII) increased their shareholding in the firm by 0.4% from the December quarter.

Did not seek Moratorium initially

Shriram Transport Finance told investors that the firm did not seek moratorium from lenders and made all liability repayments in the first moratorium period ending May 31, as it had sufficient liquidity at the end of March. Shriram Transport Finance however did approach the banks for the second moratorium phase and 8-9 banks agreed to provide a moratorium to the NBFC. Asset under management (AUM) of the firm was flat on-quarter basis while it grew 5% from the previous year to Rs 1.1 lakh crore. Continuing the trend of the past 4-5 quarters, new-vehicle AUM declined 6% on-quarter. “Given the elevated moratoriums, sluggish CV demand and a loaded MHCV portfolio (~46.1% of AUM), we believe that growth and asset quality risks will remain elevated for SHTF in the near term,” said brokerage and research firm Emkay Global in a research report. The brokerage firm has a BUY call with a target price of Rs 730 per share. 

Analysts at Emkay Global said that along with Shriram Transport’s systemic loan moratorium amid an almost three-month lockdown, adequate capital, diversified liabilities and cash buffers are crucial. “We like SHTF’s CAR of ~22%, strong liquidity buffer of ~Rs104bn (~9.5% of AUM) and multiple sources of funding,” the report said. The stock is trading at P/BV (x) 0.8 and is expected to fall this fiscal year. P/E (x) was at 5.8 in financial year 2020 and might as well climb up to 9.6 in the current year. Shriram Transport Finance raised $500m of foreign currency borrowings in the March quarter.

Diverse borrowing source 

“Since the IL&FS crisis, the company has diversified into newer borrowing sources like retail NCDs and ECBs. The share of ECBs in total borrowings has increased meaningfully from 6% to 18% on-year,” said brokerage and research firm Motilal Oswal. Although AUM of Shriram Transport has been weak in the last few quarters,  Motilal Oswal said their channel checks indicate that Shriram Transport Finance’s target segments – the used CV and driver cum operator segments – are doing much better than the other segments in CV financing. 

“We downgrade our EPS estimates by 11% for FY21E on the back of lower loan book growth. Maintain Buy with a TP of Rs 960 at 1x PBV FY22E,” Motilal Oswal said. The stock has been rally for the last little less than a month, gaining 27% during this period.  Yes Securities, while stating that the stock is better placed among peers on capital position and potential recovery in collection efficiency during June‐August, estimates the stock to jump 33% from current levels to reach a target price of Rs 850 per share.

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