Shriram Transport: Business bounce back at full throttle in Q3

Disbursements at pre-covid levels, assuring commentary on slippages and asset quality are positives

Shriram Transport’s December quarter (Q3) results was the first in perhaps two years that the financier did not disappoint the Street on any aspect – whether growth, asset quality or demand revival. The Street rewarded the stock with over 16 per cent gains reacting to results announced after market hours on Thursday.

For a company that went into a slump even before Covid for reasons like high cost of funds, weak demand and consequently asset quality pressures, Q3’s mere 1.6 per cent increase in net interest income, backed by 5.5 per cent increase in AUM (assets under management) growth was a good enough to cheer. This has led brokerages to revise their earnings expectation upwards by 15 – 36 per cent for FY22 – 23 and CLSA upgraded the stock from ‘outperform’ to ‘buy’. Upgrades come after 12 – 18 months of break and Shriram Transport’s earnings revision is the highest so far in the financial services space.

Collection efficiency touching 104 per cent in December is a key indicator of business normalization. Commentary on tightening the lending practices such as no top-up loans to customers until they meet their existing obligations and on boarding 30–35 per cent of new to Shriram Transport’s customers through the referral practice (a custom once popular among banks which helped in tracing the customer in case of default) also suggests that the management is prudent on its growth in the near-term.

As for Q3’s AUM growth, the rebound is growth is backed by its mainstay business – used vehicles – up nine per cent year-on-year. The dependence on some of the newly introduced segments such as working capital loans and business loans, to beat the slowdown in the recent period, reduced by down 350 basis points (bps) in Q3. Within the used vehicles segment, heavy commercial vehicles posted 10 per cent year-on-year growth and medium and light commercial vehicles up nine per cent year-on-year.

In short, Shriram Transport’s Q3 numbers reiterate that the market leaders rebound faster than peers.

Yet, Shriram Transport stock may possibly see some correction from current levels mainly due to its asset quality. While on a sequential and year-on-year basis, numbers improved in Q3, about three per cent of its book is likely to be restructured in the coming months. The run-rate so far is 0.3 per cent of total AUM or Rs 310 crore. As more accounts come for recast, the picture may change, and as analysts at Emkay Global Financial Services say the proportion of restructured loans will remain a concern.

For investors, despite Friday’s rally, Shriram Transport stock continues to trade at undemanding valuations of 1.1x FY22 estimated book. However, buying into correction could be more rewarding.