Shriram Transport Finance Share price soars 14% after strong Q3: Asset quality performance healthy says Motilal Oswal

Motilal Oswal Highlights Shriram Transport Finance Q3 FY21 PAT declined 17% YoY to Rs 7.3 bn (8% miss). Operating profit beat our estimate by 3%; however, higher-than expected provisions on the back of Covid-related provisioning of Rs 2.25 bn led to the PAT miss. In 9M FY21, Shriram Transport Finance NII and PPOP were largely flat on a YoY basis, while PAT declined 24% YoY due to elevated credit costs.

Sharp improvement in disbursements; spreads up 35 bps YoY:

Motilal Oswal says that disbursements improved to 110% of YoY levels to Rs 126 bn in Q3 FY21 from 50% of YoY levels in Q2 FY21. 97% of disbursements were in the Used Vehicle Financing segment. As a result, AUM grew 1% QoQ / 5% YoY to Rs 1.15 tn. Note that the drag on AUM growth stems from the New Vehicles and Business Loans segments, the Used Vehicle Financing segment grew 3% QoQ / 9% YoY to Rs 1.01 tn. The share of used vehicle financing in total AUM has increased 500bp to 88% over the past two years. Spreads (Cal) increased 35bp YoY to 7.4%, driven by higher yield. However, NIM on AUM was down 25 bps due to the drag from higher liquidity. Shriram Transport Finance has Rs 134 bn liquidity on the balance sheet (14% of borrowings). The reported margins on AUM, increased by 22 bps (QoQ) to 6.88%.

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Healthy collection efficiency; GS3 ratio improves sequentially:

In the three months post the moratorium (Sep–Nov’20), collection efficiency stood at 95–97%. This improved to 104% in Dec’20. Given healthy collection trends, the GS3 ratio improved 15bp to 7.1%. Note that this excludes the dispensation provided by the SC. The company shored up its ECL provisions by Rs 2.2 bn, taking the total buffer to Rs 25 bn. Interestingly, at 4.1%, Shriram Transport Finance carries the highest Stage 1 and 2 provisions in Motilal Oswal’s Coverage Universe. Additionally, Shriram Transport Finance looks to restructure around Rs 22.7 bn worth of loans (2% of the loan book).

Shriram Transport Finance has also increased liquidity to 14% of borrowings. AUM growth has been weak for the past several quarters, but there are signs of reversal, especially in its core segment of Used Vehicle Financing. On the asset quality front, Shriram Transport Finance has done a good job of reducing the GNPL ratio over the past year. The restructured amount of 2% is moderately better than the initial management.