Buy Shriram Transport Finance; target of Rs 880: YES Securities

YES Securities' research report on Shriram Transport Finance

A healthy operating performance with PPOP coming in-line with expectation. Miss on NII (decline in NIM) was made up by cost containment (driven partially by structural measures). Additional covid-related prov. of Rs9.6bn weighed on earnings, while asset quality was stable due to standstill. Cumulative covid buffer at Rs18.7bn (1.7% of on-book AUM). Conservative built-up of prov. also reflected in ECL cover of 39% on Stage-3 assets and 3.7% on Stage 1&2 assets. 71% and 73% of borrowers paid in June and July respectively. However, collection efficiency was lower at 50-55% as many customers paid partial installments. Management believes many such customers are retaining cash for lockdown uncertainty or to support business operations. Collection trends are expected to improve in August and September. After moratorium ends, the company will deploy its usual recovery methods (including repo threat) which should drive-up collections. In worst case, management sees restructuring requirement for 5-10% of borrowers. No further additional prov. requirement seen if covid situation does not worsen; implying normalization of credit cost in H2. While excess liquidity will be carried for a while, NIM is expected to improve by Q4 FY21 with easing incremental funding cost. Extant BS liquidity (Rs97bn), unused bank lines (Rs20bn), branch activation for deposits, improving funding availability and rising collections place SHTF comfortably for meeting liability repayments and business requirements. Notwithstanding that SHTF caters to riskier customers segment (owner-drivers), company’s covid buffer stands higher than peers, thus cushions future P&L outcomes.

Outlook

Even if significant delinquencies flow in ensuing quarters, the incremental credit cost requirement may not be very large (PPOP can absorb). Expect near-normal credit cost in FY22. Retain BUY.

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