Shriram Transport rating: Retain ‘buy’ with fair value at Rs 1,050

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Published: June 13, 2020 7:17 AM

With m-o-m improvement, STFC collected EMIs from about 52% of its borrowers, translating to 33%+ collection efficiency (about 50% of its CVs were on road); this compares with typical 70%+ stage 1 collections.

Shriram transport, investment in shriram transport, where should I invest, expert advise on investments, should I invest in shriram transport, analyst cornerWe expect near-term business to remain weak.

STFC’s asset quality performance during 4QFY20 was better than most peers even as curtailing slippages in FY2021 remains the key challenge. STFC’s borrowers are from the most vulnerable segment although several positives will help collections in the near term. Near-term business momentum will remain weak with the impending risk of likely dilution although current trough valuations reflect all the aforesaid. Retain BUY; fair value Rs 1,050 (down from Rs 1,100).

With m-o-m improvement, STFC collected EMIs from about 52% of its borrowers, translating to 33%+ collection efficiency (about 50% of its CVs were on road); this compares with typical 70%+ stage 1 collections.

Will FTUs gain from absence of drivers in the near term? Market sources suggest that over >50% of the CVs are already plying on road. Large fleet operators are struggling with the absence of drivers. This puts FTUs in a considerably advantaged position.

With expectations of a normal monsoon and buoyant rural kharif realisation, the rural business will benefit. This will offset loss of business during the lockdown. CV price inflation will reduce LGD. STFC’s loans have duration of about three years; used CVs have LTVs of about 65% and new CVs of over 75%. Extension in periods of moratorium thereby elongating the loan tenure poses risk of increase in LTVs as the vehicle depreciates over time. In this backdrop, rise in CV prices (about 10-15%) post the change in emission norms will help reduce such recovery losses.

We expect near-term business to remain weak with ~35% decline in disbursements in FY2021E; large credit losses, which remain challenging to forecast, are due to the volatile cash flows of FTUs and the prolonged lockdown/moratorium; we expect STFC to get back to 16%+ RoE only by FY2023E. Even as recent trends in funding appear comfortable, we see risk of the company raising capital to provide buffer in an extremely risk-averse environment. Shareholder dilution, due to likely capital issuance below book value, poses risk to existing shareholders. Additionally, the impending merger will continue to overhang. Retain ‘buy’ with fair value of Rs 1,050 (down from Rs 1,100).

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