SHTF has provided guarantee (Rs 8.7 bn) for NCDs issued by SVL Ltd., an unlisted Shriram group co. With SVL/subsidiaries likely under financial stress, NCD repayment may be an issue. Other group cos could aid in repayment, but if guarantee is invoked & liability devolves on SHTF, its BV may be hit by 4-5%. Additional provision may be needed under IndAS, but we await clarity. Retain Buy given our positive view on CV cycle & reasonable valuations.
Potential 4% post tax BV hit, if guarantee invoked: If SVL defaults on the NCDs and the guarantee is invoked, potential hit to SHTF’s BV could be around 4% post tax (Rs 29/share). There is lack of clarity as to whether SHTF has to make additional provisions for this non funded exposure as per IndAS. Potential 100% provisioning may hit tier I capital (14.2% Q4FY18) by 50 bps, thus accelerating need for capital raise.
We have Buy rating: While SHTF’s non funded exposure is a negative, we retain our Buy rating, as we stay constructive on CV outlook. We believe strong loan growth, stable NIM and falling credit costs should drive 42% EPS CAGR and 80bps RoA expansion over FY18-20e. Post recent pullback, valuations at 2x FY19e BV (1.7x FY20e BV) appear attractive. Adjusting for potential BV erosion of 4-5%, valuations at 2.1x FY19e BV (1.8x FY20 BV) still appear reasonable.