Shriram Transport: Biz rebound at full throttle in Q3

Disbursements at pre-covid levels, assuring commentary on slippages, asset quality are positives

Shriram Transport Finance’s December quarter (Q3) results was the first time in two years when the commercial vehicle financier did not disappoint the Street — whether it was on growth, asset quality or demand revival. The Street rewarded the stock — it surged over 16 per cent, following the announcement of results on Thursday evening.

For a company that went into a slump before the pandemic for reasons such as high cost of funds, weak demand, and asset quality pressures, Q3’s 1.6-per cent increase in net interest income, backed by 5.5-per cent increase in AUM growth, was reason enough to cheer. This led brokerages to revise their earnings expectation upwards by 15-36 per cent for FY22-23, with some like CLSA upgrading the stock from ‘outperform’ to ‘buy’.

The upgrades come after a 12–18-month pause. Shriram Transport’s earnings revision is the highest so far in the financial services space in Q3.

Collection efficiency touching 104 per cent in December is a key indicator of business normalisation. Commentary on tightening lending practices, such as no top-up loans to customers until they meet their existing obligations and on-boarding 30–35 per cent of new customers through the referral practice, also suggests the management is prudent on growth in the near-term.

As for Q3’s 9-per cent yearon-year (YOY) AUM growth, the rebound is backed by its mainstay business — loans for purchase of used/pre-owned vehicles. Dependence on newly introduced segments such as working capital loans and business loans to beat the slowdown reduced 350 basis points in Q3. Within the used vehicles segment, heavy commercial vehicles posted 10 per cent YOY growth and medium and light commercial vehicles were up 9 per cent YOY.

Shriram Transport’s Q3 numbers indicate the market leader has rebounded faster than its peers.

Yet, the Shriram Transport stock may possibly see some correction from the current levels, mainly due to its asset quality. While on a sequential and YOY basis, the numbers improved in Q3, around 3 per cent of its book is likely to be restructured in the coming months. The run-rate so far is 0.3 per cent of total AUM, or ~310 crore. As more accounts come up for recast, the picture may alter. As analysts at Emkay Global Financial Services say, the proportion of restructured loans will remain a concern.

For investors, despite Friday’s rally, the Shriram Transport stock continues to trade at undemanding valuations of 1.1x its 2021-22 estimated book. However, buying into correction could be more rewarding.