Slow commercial vehicle sales cap upsides for Shriram Transport Finance

As disbursements weaken, loan growth may come under pressure; the company's possible merger with Shriram City Union also an overhang

Shriram Transport Finance reported a net profit of Rs 746 crore in the January-March quarter of 2018-19 — down over 22 per cent from the same quarter a year earlier. The stock did not react adversely to the quarterly numbers, given weak expectations from the commercial vehicle (CV) financier, but that does not ease the pain beneath the surface.

With CVs comprising 84 per cent of its loan book, the company’s overall disbursements during the quarter declined by over 20 per cent when compared with a year ago, limiting its assets under management (AUM, or loan assets plus investments) growth at just 8.5 per cent. Loans for new CVs dropped 74 per cent during the quarter.
 

The company's January-March (Q4) show is particularly weak, considering that it had posted a robust double-digit (21 per cent) growth in 2017-18. On a positive note, the total AUM touched the Rs 1-trillion mark. Liquidity pressures hurt the company's financials during the quarter. Profitability, measured as net interest margin (NIM), contracted 39 basis points (bps) year-on-year to 7.2 per cent in Q4.

Moreover, with limited operating levers coming through, for the first time in many years, Shriram Transport's operating profit fell seven per cent to Rs 1,484 crore on a sequential basis. Year-on-year, though, there was a marginal improvement of three per cent. 

Provisioning cost for the company spiralled to Rs 540 crore in Q4 from Rs 97 crore in the year-ago period, though it softened from Rs 636 crore in the December quarter. 

With the provision coverage ratio maintained at 70 per cent, the sequential fall in asset quality is not perceived negaitively by the Street. Gross non-performing assets (GNPA) ratio softened to 8.3 per cent from 9.4 per cent in the year-ago period. Incidentally, it was also the lowest in five quarters. 
 

In Q4, however, the NPA ratio was helped by one-off gains of Rs 140 crore from a stake sale in Shriram Automall.

The key concern for the stock is that of AUM growth. Analysts at CLSA say that AUM growth may not meet the guidance of 18-20 per cent in FY20. with cyclical demand pressure expected to remain for another one year. Analysts suggest bracing for a contraction of 100 basis points (bps) in return on equity in FY20.

The financier also stares at a possible merger with sister concern Shriram City Union, which focuses on housing finance and small business loans.

Yet, the Street isn’t losing faith in the Shriram Transport stock, with 30 of 38 analysts polled by Bloomberg retaining the ‘buy’ call. However, the average one-year target price of Rs 1,310 apiece doesn’t leave much legroom for investors in the medium term.