Shriram Transport stock: Loan growth led by rural recovery is a positive

The stock of Shriram Transport Finance Company (STFC) has been under pressure from issues related to SVL, the holding company of the Shriram Group's non-financial business, which has defaulted on non-convertible debentures (NCD). STFC, which typically funds purchase of used commercial vehicles, had offered a corporate guarantee of Rs 8.7 billion to its holding company. According to analysts, STFC's book value would get hit by 4-5 per cent if the guarantee is invoked.  

MD and CEO of STFC Umesh Revankar has, however, said SVL is trying to resolve the issues on its own, shrugging off the possibility of any impact on STFC's financials. Even if the guarantee is invoked, it would be borne by the promoters, he said.

On the operational front, the company reported a robust performance in the June quarter, with the loan book growing by 22.3 per cent year on year to Rs 1 trillion. Net interest income and net profit moved up by 19.6 per cent to Rs 18.4 billion and 24.4 per cent to Rs 5.7 billion, respectively. The management expects loan book to grow by 18-20 per cent in the current financial year on the back of a strong rural growth. While there will be some impact of axle load norms and high fuel prices on new vehicle business, this is unlikely to affect used vehicles, which account for 84 per cent of total assets under management or AUM for STFC. AUM indicates size of the loan book.

Focus on increasing the share of public deposits in borrowings and lower-term loan dependence should enable STFC protect its margin amid rising interest rates, observe analysts. The management expects net interest margin to be at 7-7.5 per cent in 2018-19, with the company passing on increased cost of funds to borrowers to protect its margin.

Further earnings support also stems from lower expected credit losses (ECLs) on account of bad loans. 

“In the June quarter, non-performing loans (NPLs) under IND AS (Indian Accounting Standards) were more than IGAAP owing to higher default probability/loss given default. However, now things are improving with recovery in the rural economy. This should bring down NPLs and expected losses,” the MD said. 

Against this backdrop, the stock, which is trading at 1.5 times 2019-20 expected book value is a good investment opportunity.