S&P affirms Shriram Transport Finance Co's rating, removes from CreditWatch

Global rating agency Standard and Poor’s (S&P) has affirmed issuer credit rating 'BB-/B' to Indian auto financier Shriram Transport Finance Co (STFC) due to improvement in its resource mobilisation and collections.

It also removed the ratings from CreditWatch. The rating were placed under watch with negative implications on June 26, 2020.

The company is likely to sustain a recent improvement in its resource mobilisation, collections, and on-balance-sheet liquidity over the next 12 months, S&P said in a statement.

The stable outlook on STFC reflects the view that the company's deterioration in asset quality will be manageable over the next 12 months.

The company's results for the second quarter of fiscal 2021 (Q2FY21) were better than expected, with a material recovery in semi-urban and rural markets. The reopening of the Indian economy following Covid-19 has increased cash flows of road transport operators (the company's key borrowers). Collections have improved significantly and were more than 90 per cent (by value) in September-November, compared with about 50 per cent in June-August and 30 per cent in May.

STFC's ability to tap various sources for funds over the past three to four months, including from banks, capital markets, and securitisation, indicates an improvement in funding conditions.

The company also raised Rs 15 billion equity capital through a rights issue in August. This has improved its Tier 1 capital ratio by 200 basis points to 20.1 per cent as of Sept. 30, 2020, it added.

The ratings factor in a deterioration in the India-based finance company's asset quality over the next few quarters owing to Covid-19. The company's reported stage-3 (more than 90 days past due) loans declined to 7.3 per cent of gross loans at end-September 2020, from 8 per cent a quarter ago.

The improvement in asset quality was helped by a six-month moratorium on loan repayment that lasted until end-August, and financial savings of borrowers.

About three per cent of STFC's gross loans to be stressed as mobility in urban areas remains below pre-pandemic levels. The stressed borrowers mainly operate passenger vehicles such as taxis, school or office buses, and their number of trips has declined significantly, hurting earnings.