Bulls make a comeback in Shriram Transport
Positive fundamentals are boosting sentiment
The share price of Shriram Transport Finance has gained about 19 per cent in the past one month, far higher than the 1.5–3 per cent rise on the BSE Sensex and Nifty. The price movement is not only an indicator of change in sentiment but also reiterates the long-term comfort investors have had with the stock. The deal with IDFC Limited, called off about a month ago, came as a major relief as it was said to be value depletive for its shareholders. The news also followed a satisfying September quarter (Q2) results. Interestingly, the road ahead also looks promising for the financier. With two back-toback years of decent monsoon, analysts expect Shriram Transport’s loan book to expand 14–17 per cent in the next two years. Asset quality, too, is on the mend and with bad loans much below the peak level of 9–10 per cent seen in the past two years.
Strong performance in Q2 only affirms this faith. Net interest income grew by 21 per cent, helped by a 13.5 per cent growth in assets under management (AUM). This also bumped up the quarter’s profitability or net interest margin to 7.5 per cent as against 7.1 per cent in the corresponding year-ago period. The profitability, however, may see some disturbance if the share of the new vehicle finance business increases from the current 10 per cent level, given the extent of competition from banks and non-banking finance companies and also the relatively lower margin it earns. Nonetheless, if the used vehicles finance business drives growth, Shriram Transport shouldn’t face much headwinds on this factor as there are only a few strong organised players in this space. Currently, much of the loan growth is driven by its core business of used vehicles (about 80 per cent of its total AUM), which grew at 13 per cent year-on-year in Q2. With a significant part of this book priced at fixed interest rate, profitability may not take a sharp hit, unless cost of funds increase unexpectedly.
The key monitorable, however, is tracking the asset quality. As Shriram Transport would adopt tighter provisioning norms — from 120 days’ dues per day (DPD) in Q2 to 90 DPD from the December quarter, the management has guided for 1–1.5 per cent increase in gross non-performing assets (NPA) ratio. Since this is more of a procedural reset, the Street isn’t very concerned as yet. Nonetheless, Q2’s gross NPA ratio rose to 8.1 per cent against 6.6 per cent a year ago (based on 150 DPD). On the positive side, the 71.3 per cent provision coverage ratio (among the best in the industry) hints that a bulk of stress has been recognised.
The reasonable asking rate (2x FY19 price-to-book) also increases Shriram Transport stock’s appeal among investors. If asset quality doesn’t throw up fresh surprises in the December quarter, levers for re-rating are intact.