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.
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.