Shriram Finance Ltd - Stock Valuation and Financial Performance

Market Cap 33,950 Cr
CMP 1,255
P/B 1.21

Check 10 year X-ray here

Key Highlight –

• Advances decreased in New CV, business and working capital loan segments by 9.39%, 22.21% & 8.49% on yearly basis.
• Asset quality improved GNPA & NNPA declined by 0.32% and 0.7% to 6.93% and 3.48% on yearly basis.
• PAT by inclined 38.33% to 1066.87 Cr on yearly basis.
• Company received approval of regulators for merger between Shriram Capital and Shriram City Union Finance with Shriram Transport Finance.

Management Outlook -

• Management expects growth of 15% in AUM for combined entity.
• Management expects cost of borrowingto move up by 0.5-0.7%, while NIM of 7% with +/-0.20% range.
• Management guided on credit cost being around 2%.

Event update: The Shriram Group entities Shriram Transport Finance (STF) and Shriram City Union Finance (SCU) will be merged to become a largest retail lending company, Shriram Finance Ltd.

STF, the largest group company in the group (AUM > 1,20,000 Cr) and overall company will be called Shriram Finance (AUM > 1,50,000 Cr)

Current CEO of STF Mr. Umesh Revankar will be Vice Chairman of Shriram Finance. SCU MD & CEO YS Chakravarti will be MD & CEO of Shriram Finance.

STF is a commercial vehicle lender with > 75% portfolio in commercial vehicles while SCU is a SME lender, largest 2w financier and lends against gold.

Outlook:STF and SCU will be merged and together finance rural and unbanked population. Although both the companies have little overlap in terms of business model (STF is a lender to Commercial vehicles while SCU is retail small ticket loans), together the loan book will become more diversified and stable. Both the firms earn similar ROE, albeit STF has higher earning power than SCU.

The management expects cost of funds to come down post merger and additional cross selling opportunities.

We recommend to reduce exposure to banking and financials. There are valid concerns on growth and rise in NPA. At the time of purchase all financials were reporting good loan growth and growth in earnings so we didn't hesitate to add. After correction, they were trading too cheap and factored in most of the negatives. We didn't recommend to Sell.

But now after recent rise in prices, risk-reward is not favorable. We believe that large-cap private sector banks are well placed for long term growth, so these can be held for long term.

Small-sized NBFC & banks may face slowdown in growth during the period of high provisioning. We are recommending Sell on such stocks. We will be selling them at a loss of 10-35%. We recommend to free up cash and we shall recover these losses from other stocks over next few months.

Results: Shriram Transport Finance (STFC) reported 2% growth in net interest income year on year. Pre-provision profits were flat. Loan growth was 5% while disbursement declined 51% over previous year, primarily due to conservative stance and lower demand.

Key highlights:

• Old CV growth was 8% versus 16% decline in new CV loan book.
• Collection efficiency is close to 95%, same as pre-covid levels.
• Stressed book at less than 3% comprising of can aggregators, tours and transport. This might be restructured by quarter end.
• Gross NPA have reduced to 6.5% versus 8.8 in previous year, however, the NPA can increase as restructured loan book may slip into NPA.
• Capital adequacy ratio, a primary indicator for  NBFC’s health is at 23.4% from 20.4% in previous year from rights issue.

Outlook: STFC’s management expects AUM growth of 5-6% in second half of FY21. Collection efficiency gives confidence that loans under restructuring will be lower than anticipated. Adequate capital availability will help the company provide for stressed/delinquent assets as well as pursue growth. Demand is good in Tier-II/III/IV cities as Covid spread is low in these areas.

Shriram Transport Finance Co Ltd | Market Cap: 17,369 Cr

CMP 686 | P/B ratio 1x FY22

Recommendation | BUY

Click here for 10 year X-ray

Results: Shriram Transport Finance’s (STFC) Net Interest Income* declined by 6.51% and Total Income increased 2.82% year on year. Loan book grew by 5% year on year.

Key Highlights:-

• STFC’s year on year decline in the loan book came from New Vehicle Loans (-15.7%), Business Loans (-13.4%). The Used Vehicles Loans and Working Capital Loans however grew by 7.7% and 26.5% respectively.
• In spite of the moratorium, the company has been able to collect from 52%, 71% and 73% borrowers in the month of May, June and July 2020 respectively.
• Year on year comparison shows strong asset quality as Net Stage 3 Non Performing Exposures** declined by 9.8%.
• Total number of branches stood at 1,758 out of which 844 were in rural areas while 914 were in urban areas.
• Additional provision created during the quarter for Covid-19 was Rs 956 Cr.

Outlook: STFC has deferred branch expansion plans and minimised the discretionary expenses. As per the management, business has picked up in the rural market due to harvest season and subsequent activities of Kharif sowing. The company has controlled its operating expenses as senior management agreed to a salary cut of 20% during the quarter and most of the rental cost was renegotiated causing rent expense to decline. The company completed its rights issue of Rs. 1500 Cr in July 2020.

Moneyworks4me Opinion: We maintain BUY on Shriram Transport. Used CV is a long term growth opportunity. Competition is low and few companies like STFC can manage to maintain scale and profitability. Used CV requires long term relationship with truck owner and ability to recover from borrowers in remote locations. STFC has around 16,000 field agents to perform this feat. 

The agriculture sector is expected to give good yields. This could help restrict huge spike in NPA. Besides, STFC has asset backed lending which helps the company to recover its loan amount even after its categorized as NPA. Current stock price assumes around 8% in loan given default. (Assuming valuation of the company at 1x FY22 Book value). We find this very pessimistic assumption. We are confident that most of the negatives are already in the price. If market acknowledges this anomaly, the stock will bounce back or we will wait for better quarterly results.

* Net Interest Income- Total interest earned by a company on loan minus Total interest that it expended on its borrowings.

**Stage 3 Non Performing Exposures- Payment not made for more than 90 days

^In all rural facing NBFCs, NPA accrue in first two quarters of financial year and decline over other two quarters (as evident from quarter on quarter decline in Stage 3 NPE in current quarter)

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