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Improving Outlook; Upgrade to BUY
Shriram Transport Finance (STFC) has reported a strong growth in PAT at Rs3.74bn (up 16.5% yoy & 160% qoq) in 1QFY17 led by lower NPA provisioning and decent growth in pre-provisioning profit, which grew by 19.4% yoy to Rs10.3bn on the back of 15.5% qoq growth in NII & 41.8% yoy growth in net securitisation income.
Shriram Transport Finance (STFC) has reported a strong growth in PAT at Rs3.74bn (up 16.5% yoy & 160% qoq) in 1QFY17 led by lower NPA provisioning and decent growth in pre-provisioning profit, which grew by 19.4% yoy to Rs10.3bn on the back of 15.5% qoq growth in NII & 41.8% yoy growth in net securitisation income.
NIM declined to 7.35% in 1QFY17 from 7.65% in 4QFY16 due to merger of troubled equipment finance subsidiary in the last quarter.
The Company witnessed healthy growth in disbursements in 1QFY17 on account of improvement in new CV demand. AUM for New & Pre-owned CV segment grew by 71.6% yoy (6.2% qoq) & 19.6% yoy (2.5% qoq) to Rs80.4bn & Rs667bn, respectively.
Its gross NPA ratio rose marginally to 6.4% in 1QFY17 from 6.2% in 4QFY16 led by higher slippages from Equipment Finance book.
As improved outlook on monsoon and uptick in execution of infrastructure projects augur well for the Company, we upgrade our recommendation on the stock to BUY with an upwardly revised price Target Price of Rs1,459.
Key Management Commentary:
- Recent decision of National Green Tribunal (NGT) to ban vehicle over 10 years is a longterm positive for STFC. It expects higher replacement demand along with improved pricing for 4-6 year old vehicle.
- Currently, vehicles older than 10 years contribute ~6% to STFC’s AUM. Its Board of Directors has decided to discontinue financing vehicle older than 10 years.
- STFC’s Management expects a healthy growth in CV demand in FY17E, which will aid growth in AUM. Focus is on improving the efficiency of current franchise and gradual expansion of network.
- Its Management expects GNPA has peaked out and assets quality will improve on comparable bucket level. However, GNPA ratio is expected to rise by 100-150bps due to shifting of GNPA recognition to 120 days by March 2017.
Outlook & Valuation
In our view, gradual improvement in business outlook along with improving funding scenario augurs well for STFC in mid to long-term.
As we believe that improved outlook on monsoon and uptick in execution of infrastructure projects will help STFC to ensure growth in AUM and ease pressure on asset quality, we assign BUY recommendation on the stock (from HOLD) with an upwardly revised price Target Price of Rs1,459.
