Shriram Transport: Earnings estimates downgraded

Equipment finance subsidiary's weak show likely to continue

Shriram Transport Finance (STFC)’s consolidated numbers for the March quarter were impacted by a sharp rise in non-performing assets (NPAs) of its equipment finance subsidiary. The gross NPA of its equipment finance business (five per cent of overall assets under management) jumped from 2.9 per cent in the December quarter to 15.7 per cent in the March quarter.

Consolidated net profit fell 73.3 per cent over a year to Rs 84 crore. The bad news does not end here. The management could declare loans worth another Rs 400 crore as NPAs in the coming quarters in the equipment finance business. This could again lead to a surge in the gross NPA ratio of this subsidiary to about 30 per cent. STFC also plans to infuse Rs 100 crore to shore up the net worth, as well as tier-I ratio of its equipment finance subsidiary. Some analysts though believe STFC might need to add more capital in the subsidiary.

“We believe STFC will have to infuse more capital into the subsidiary to maintain a tier-1 above 10-11 per cent till recovery gathers pace,” say analysts at Religare Capital Markets. They have trimmed the equipment finance subsidiary’s value from Rs 88 per share earlier to Rs 10 per share of STFC.

The subsidiary’s NPAs have increased due to delayed government payments over the past 12 to 18 months. Delay in pick-up in infrastructure activity has impacted payments from contractors.

  After the dismal show, most analysts have trimmed their FY16 earnings estimates by 10-12 per cent for STFC. The scrip has under-performed the S&P BSE Sensex in recent times. Even as analysts remain bullish on STFC from a long-term view, as it is a direct play on recovery in commercial vehicles, they expect the stock to be under pressure in the near term, due to the weakness in its equipment finance subsidiary. The results that came after market hours on Thursday saw the stock fall almost 15 per cent to close at Rs 828 on Monday.

Positively, STFC stands to gain from lower interest rates, as banks form 67 per cent of its total borrowings.

On a standalone basis, though, for the March quarter, STFC’s net profit of Rs 317 crore (up 7.4 per cent year-on-year) was 6.7 per cent lower than the Bloomberg consensus of Rs 339 crore. But, the bottom line was led by a strong 49 per cent year-on-year growth in net interest income to Rs 948 crore besides healthy AUM growth (up 10 per cent year-on-year) and control over slippages.

Management expects AUM growth to be between 10-12% in FY16 and it could touch 15% in case of a good monsoon. The growth in AUMs came from used CVs (92% of overall AUM, up 15.4% year-on-year) in the quarter; new CV AUMs fell 25.1% year-on-year and remained weak. Net interest margin (NIM) improved 10 basis points sequentially and 20 basis points year-on-year to 6.7% due to easing cost of funds. Management expects to maintain margin at these levels going forward.