Shriram Transport: Growth potential outweighing asset quality concerns

Recovery in commercial vehicle and commercial equipment sales will aid Shriram Transport's revenues

While the stock market has not been kind to any financial institution posting steep escalation in their gross non-performing asset (NPA) levels in the December quarter (Q3), the Shriram Transport Finance (STFL) stock is an exception, with five per cent year-to-date gains. This is better than most peers, as well as the Sensex’s 5.7 per cent fall in this period.

This is despite the company’s Q3 gross NPAs jumping 42 per cent year-on-year to Rs 2,536 crore. The gross NPA ratio or GNPL ratio (gross NPA as a percentage of total loans), thus, went up from 3.6 per cent in Q3’ of FY15 to 4.3 per cent. However, the Street is not perturbed, as net interest income (NII) and as net profit posted strong growth despite huge provisioning. The decent festive demand helped NII at Rs 1,144 crore increase by 24 per cent year-on-year in Q3’FY16.

  Net interest margins at 7.5 per cent also expanded by 90 basis points year-on-year, as cost-to-income ratio declined from 23.5 per cent in Q3’FY15 to 23.2 per cent in Q3’FY16. Despite provisioning soaring by 32 per cent, STFL posted a 20 per cent growth in net profit (Rs 375 crore) in Q3’FY16. That said, GNPL ratio might remain elevated due to the merger of the commercial equipment business with STFL in Q4’FY16 and change in regulatory requirements. The merger will push up the gross NPA by Rs 1,000 crore and the management has guided for GNPL ratio of six per cent in Q4’FY16. Transitioning from 180 days per dues to 120 in FY17 and 90 in FY18 will also add to the stress. However, HSBC in its report, says this is unlikely to impact profitability or margins due to existing 80 per cent provision coverage ratio.

Going forward, analysts feel recovery in commercial vehicle (CV) sales and the budgetary push for rural economy might also give crucial support to STFL’s revenues, outweighing the asset quality stress. Even as financing used CVs remains the mainstay for STFL, accounting for 91 per cent of its loan book, lately with new CV sales catching up it has helped balance the slowdown in rural pockets. Although financing of used the CV space is heavily crowded, Edelweiss says the business intelligence of STFL, which is now difficult to replicate, will help survive competition. Analysts at JM Financial believe STFL will be a significant beneficiary of revival in the CV and commercial equipment business. According to a Bloomberg poll, 22 of 36 analysts have a ‘buy’ rating on the stock.