Shriram Transport posts sharpest fall in 19-months, turns investors jittery

Shares of Shriram Transport Finance Company (STFC) tanked 19 per cent to Rs 1,047 in intra-day deals to record its sharpest fall in past 19 months on the BSE. The fall comes on the back of concerns of a possible default in payment of interest on non-convertible debentures (NCDs) of an unlisted Shriram group company, SVL Ltd, for whom Shriram Transport has extended guarantees.

Though the management assuaged investors' concerns, the market was clearly not in a mood to listen – at least on Wednesday. The stock ended the day at Rs 1,145 levels, down 12 per cent, as compared to 0.75 per cent rise in the S&P BSE Sensex.

In FY16, STFC had provided a guarantee on loans worth Rs 8.7 billion taken by SVL (erstwhile Shriram Industrial Holdings Ltd), unlisted Holding Co of non-financial businesses of Shriram Group. This was revealed in the company's annual report recently.

Analysts at Jefferies believe cash flows at SVL and the other subsidiaries may be inadequate to service the NCD, but other companies within Shriram group may potentially refinance/aid in repayment.

“With SVL /subsidiaries likely under financial stress, NCD repayment may be an issue. Other group companies could aid in repayment, but if guarantee is invoked and liability devolves on Shriram Transport Finance, its book value (BV) may be hit by 4 – 5 per cent (Rs 29 per share). Additional provision may be needed under IndAS, but we await clarity,” Bhaskar Basu and Harshit Toshniwal of Jefferies said in a note while maintaining a buy rating on the stock with a target price of Rs 1,890.

The Promoters of STFC are also addressing the above with SVL Group to get the settlement of the dues on or before the due date, failing which, the Promoters/Promoter Group of our company will address through alternate mechanisms to settle the dues, SFTC said in a release on Wednesday.

G Chokkalingam, founder and managing director at Equinomics Research, however, believes that the markets have been too harsh on the stock despite the negative news. “The impact of this could be around Rs 30 per share, while the counter slipped nearly Rs 154 on Wednesday. This is much more severe punishment than what it deserves,” he says.

Analysts at Angel Broking, too, remain bullish on the stock and have a price target of Rs 1,760. The domestic brokerage expects Shriram Transport's assets under management to grow at a compounded annual growth rate (CAGR) of 20 per cent over FY18 – 20, led by stronger commercial vehicle (CV) volume, macro recovery and improving rural market.

“The company’s return ratios are at decade low levels (return on asset/equity – 1.9 per cent/13 per cent in FY18) primarily owing to higher credit cost, which we believe to normalise from FY19 onwards and propel RoA/RoE to 2.8 per cent/20.7 per cent in FY20,” says Jaikishan J Parmar, an analyst tracking the company at Angel Broking.

Over the past few weeks, Shriram Transport has underperformed the market by falling 26 per cent from its recent high of Rs 1,543 on May 28, as compared to one per cent rise in the S&P BSE Sensex during this period.

The recent correction in stock price led by growth concerns, according to analysts at IIFL, presents a good opportunity for investors to buy the stock.

“Going by the prior valuation expansion cycle (FY11 - 14) of vehicle financiers, we learn that the growth cycle, rate cycle and the credit cycle rarely move together; and that growth and asset quality trends largely define the valuation. Given that both these factors are favourable, we believe that the recent correction, based on concerns and over borrowing cost and fuel prices, is clearly a buying opportunity,” Rajiv Mehta and Sanchit Damani of IIFL said in a July 04 note.

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