The non-banking finance companies (NBFCs) in Shriram Group --Shriram City Union Finance (SCUF) and Shriram Transport Finance Company (STFC) -- were hit by sectoral issues like tight liquidity, a slowdown in growth and risk aversion in the financial year ended March 2019.
While they are expected to report marginal quarterly improvement in the January-March period, analysts believe it will take longer for the environment to normalise.
Is this subdued outlook a reason for Piramal Enterprises to consider selling its stake in these Shriram Group companies?
We take a quick look at financials of both the NBFCs:
Shriram City Union Finance
Over half of the company's outstanding loan book is toward small and medium enterprises followed by auto and personal loans. In the quarter ended December 2018, loan disbursements fell a sharp 28 percent from the same period last year while the cost of funds firmed up as funding from banks dried up.
Growth in assets under management (AUM) fell to 11 percent in the third quarter from 20.5 percent in the second quarter and is expected to have fallen further to 8.7 percent in the fourth quarter of 2018-19. It was at Rs 28,800 crore in the December-ended quarter.
The regulatory mandate to move to 90 days bad asset recognition led to an increase in gross non-performing loans (NPL) ratio to 9 percent in the financial year 2017-18 from 6.7 percent in the previous year. At the end of the third quarter of 2018-19, the GNPL ratio stood at 8.7 percent. It’s provisioning coverage ratio also increased to 69 percent at the end of December 2018, from 62 percent in March 2018.
Last month, India Ratings noted that any signs of deterioration in the company’s funding access or rising delinquencies could lead to a marked weakening of the profitability and capital buffers.
Shriram Transport Finance Company
With the sector grappling with a slowdown in auto finance and tight liquidity, STFC’s AUM growth declined to 15.3 percent in the third quarter, from 20.9 percent in the previous quarter. It is estimated to have further fallen to 12.3 percent in the fourth quarter of 2018-19. It was at Rs 103,817 crore in the December-ended quarter.
The profit after tax increased by 17.34 percent to Rs 635.45 crores in the December-ended quarter, as against Rs. 541.54 crore recorded in the same period of the previous year. Gross NPA ratio was at 8.97 percent, up from 7.98 percent in the same quarter last year, while net NPA ratio was at 2.78 percent, up from 2.45 percent in the same period.
In future, higher funding costs are likely to keep net interest margins under pressure. It was at 7.44 percent at the end of December 2018 from 7.57 percent a year ago. Term loans, as a part of the borrowing pie, fell from 27.5 percent to 20.9 percent in the December-ended quarter, over last year. Its reliance on commercial papers shot up from 0.7 percent to 6.6 percent in the same period.
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