Shriram Transport: Street hasn't turned cautious despite fall in profit

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The Shriram Transport Finance stock, which was among the top gainers on Tuesday — up over 4 per cent even as the Sensex ended flat — has been on a rise since the announcement of its results last week. 

These gains came despite its December quarter (Q3) earnings being the weakest in recent times. In the last three months, concerns over receding demand for commercial vehicles (CVs) have been a drag on the stock. However, analysts haven’t turned negative on the stock, despite the numbers lagging expectations.

For one, they say that with the underlying industry trend not exhibiting strength, Shriram Transport’s sub-par Q3 results only paint a closer-to-reality picture. Near-term uncertainties are best ignored, said Abhijit Tibrewal of ICICI Securities, in his earnings note. 

“Given the tight liquidity, the firm intentionally slowed down on new CV and business loans, instead choosing to focus more on the used CVs segment,” he added.

The CV financier, and India’s largest in the pre-used CV segment, saw its assets under management (AUM) decline by half a per cent sequentially. Led by a 30 per cent sequential fall in fresh loans extended (loan disbursements), net interest income shrunk by over a per cent to Rs 1,746 crore in Q3, while net profit grew 4 per cent sequentially to Rs 542 crore. 

Yet, what gives comfort is that the cost of funds increased within the estimated band by 11 basis points (bps) as compared to Q2, and only 15 bps year-on-year (YoY). Net interest margin — a measure of profitability — remained quite stable at 7.4 per cent, down only 4 bps sequentially.

A mix of prudent lending, along with increased securitisation, assignment, and reliance on external commercial borrowings, has helped the financier. However, a fall in AUM has put stress on asset quality. Gross non-performing assets (NPA) ratio rose 100 bps YoY to 8.97 per cent, while net NPA ratio rose 33 bps to 2.78 per cent.  With liquidity gradually getting back to normal and disbursements improving at the margin, analysts at PhillipCapital expect Shriram Transport’s AUM to grow 16 per cent in FY20. 

Its market leadership in CV financing segment, coupled with pre-buying ahead of implementation of BS-VI norms in FY20, should support the turnaround in disbursals. The stock’s undemanding 1.4x FY20 price-to-book value adds comfort.

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