Improving CV cycle, lower diesel prices to benefit STFC

Disbursements pick up but asset quality on analysts' radar

Shriram Transport Finance Company (STFC) has posted a lower than expected net profit for the September quarter, owing to rising asset quality stress and credit costs. The stock fell 2.5 per cent on Tuesday, against a 0.55 per cent rise in the Sensex.

Higher than expected provisions, up 19.3 per cent year-on-year (y-o-y) to Rs 315 crore, led to a 7.5 per cent y-o-y fall net profit to Rs 302 crore. “To keep provision coverage ratio at 80 per cent, Shriram provided Rs 100 crore towards incremental slippages leading to higher than estimated provisions, impacting net profit,” write Motilal Oswal Securities analysts. Nevertheless, gross non-performing assets (NPA) ratio rose 40 basis points (bps) over the past year to 3.74 per cent, while net NPA ratio was up 10 bps y-o-y to 0.80 per cent.

The bad news, though, ends there. For one, gross NPA ratio was stable sequentially, indicating bottoming out of asset quality stress. A likely stabilisation of freight rates, recent diesel price cuts and gradual pick-up in commercial vehicle (CV) sales are the other positives.

“We believe the recent sharp reduction in diesel prices improves profitability of CV operators and reduces NPA risks though the CV recovery may be delayed. The worst period for CV operators may be behind us; with this view, we upgrade the STFC stock to ‘Add’ from ‘Reduce’, with a target price of Rs 1,000 (Rs 840 earlier),” says Nischint Chawathe of Kotak Institutional Equities.

Freight rates are expected to remain firm, which, along with expected improvement in CV utilisation levels, should rub off favourably on STFC. As macroeconomic scenario picks up, analysts expect STFC’s return on equity ratio to improve from 16 per cent in FY14 to 18-19 per cent levels in FY17. STFC’s asset under management (AUM) growth could pick up in the second half of FY15 and is estimated to grow 10-15 per cent compounded annual growth rate (CAGR) over FY14-17. Improving AUMs and asset quality will lead to 15-18 per cent earnings CAGR over the same period, say analysts. However, there is a risk. If NPA recognition norms (as recommended in draft NBFC guidelines) are changed and mandated to 90-days versus 180 days prevailing, it could mean that NPA levels will rise albeit gradually. Strong provision coverage though provides comfort.

Among other positives, STFC’s disbursement growth and margins picked up in the quarter. Disbursements grew 12 per cent y-o-y, leading to an 11.6 per cent growth in net interest income to Rs 1,007 crore. Uptick in new CV disbursements and continued traction in used vehicle disbursements fuelled disbursements’ growth.

Margins at 7.4 per cent, too, improved by 52 bps, led by higher yields and reduction of excess liquidity in STFC’s balance sheet.