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Stock Outlook & Returns
Shriram Transport Finance’s stock on Friday closed at Rs 1,379.75 apiece after a major declained of 5.40% from its previous close of 1,460.95 apiece. The stock’s 52-week low was recorded on 08 March 2022 at Rs 1,002 apiece and the 52-week high was recorded on 09 November 2021 at Rs 1,696.40 apiece, respectively.
It is a mid-cap NBFC with a market capitalization of Rs 37,324.96 crore. TTM EPS is Rs 130.04. PE ratio is 10.61 and the PB ratio is 1.51. Its face value is Rs 10 and the dividend yield is 1.45%.
It has given a negative return of 7.78% last week, however, in the last 1 month, its share price surged and gave 12.73% returns. In the past 1 year, the share price surged a little giving 0.64%. In 3 years, it gave a positive return of 42.62% and 42.23% in the past 5 years, respectively.
Disbursement momentum sustains; asset quality stable
PAT declined by 11% QoQ to Rs 9.65b (in line) in 1QFY23, driven by a sequentially higher credit costs of ~2.5% and a NIM decline of ~20bp QoQ. Price hikes in both New and Used CVs (led by the shift to BS-VI emission standards and higher steel prices) has continued to feed into higher ticket sizes and are aiding disbursements, which grew 31% YoY to ~Rs117b.
Higher ticket sizes will continue to aid healthy disbursements
AUM grew by ~3% QoQ and ~10% YoY to Rs 1.3t. Geopolitical events aside, it is difficult to predict when a sustained new CV upcycle will begin, but we feel it is around the corner. While higher ticket sizes have aided disbursements, we expect volume improvements from 2HFY23 onwards.
Asset quality stable; write-offs at a normalized run-rate
GS3/NS3 declined by ~10bp/20bp QoQ to 7%/3.5%. PCR on Stage 3 improved by 160bp QoQ to ~52%. Restructured outstanding pool stood at INR7.6b (~60bp of AUM). The company utilized COVID-related provisions of ~INR2.2b in 1QFY23 and aggregate COVID-related provisions stood at INR18.4b (~1.4% of AUM). Write-offs stood ~INR4.8b (back to the normalized run-rate of INR4-5b).
Margin compression of ~20bp QoQ; excess liquidity to gradually decline
The management said it will start to gradually reduce the excess liquidity on its Balance Sheet. We expect margin to stay stable in FY23, aided by its pricing power, lower increase in the cost of borrowings, and a reduction in the negative carry from excess liquidity. Key highlights from the management commentary. The management expects weighted average borrowing costs to rise by ~20bp in FY23. It does not foresee higher delinquencies due to higher inflation. Truck operators do not have to bear the cost of higher fuel prices as the same is passed on to the end-consumers through an increase in freight rates.
NCLT approval on the merger expected in another two months
Liability-side challenges faced by the company (even before the COVID-19 pandemic broke out) have now receded. “We maintain our Neutral rating on the announced merger as we neither see any significant synergies, nor can highlight any significant negatives. Technical reasons (of a potential supply overhang after the merger) aside, the merged entity will emerge stronger than the respective standalone businesses.” the brokerage has said.
Valuation and brokerage’s views
The brokerage said, “Shriram Transport Finance’s customers and products operate in a benign competitive landscape. It has the pricing power to pass on the higher incremental cost of borrowings to its customers. We estimate a compression of ~20bp in NIM over the next two years. We model an AUM CAGR of 11% over FY22-24, led by 11% CAGR in disbursements over the same period. We increase our FY23/FY24 EPS estimate by 6%/7% to factor in higher loan growth and lower OPEX. We estimate ~20% PAT CAGR over FY22-24, resulting in a RoA/RoE of 2.5%/13% over FY23/FY24. Concern around potential exits by investors (such as PIEL, Apax, TPG, and Sanlam) still remains an overhang on the stock. We like both the standalone businesses and believe that the merged entity will emerge stronger than the respective standalone entities. We maintain our Buy rating with a Target Price of Rs 1,690 per share (based on 1.4x FY24E BVPS).”
Shriram Transport Finance Company Ltd
Shriram Transport Finance Company Ltd. is a flagship company of the Shriram group. The company is a leader in organized financing of pre-owned trucks with a strategic presence in 5-10-year-old trucks. It has a pan-India presence. It has a vertically integrated business model and offers a number of products which includes Pre-owned CV financing, New CV financing, and other loans like accidental repair loans tyre loans and working capital finance etc.
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