Hold Shriram Transport Finance Company, target Rs 1,181: Emkay Global Financial Services

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MHCV slowdown resulting in slower disbursements: The domestic MHCVs are showing tepid demand due to high base effect, rural distress, changes in axle norms, leading to surplus capacity and slowdown in real estate. Although the implementation of BSVI emission norms may drive some pre-buying for CVs, the used CV segment is at a downturn as driver-owner is facing surplus capacity with stagnating income levels. We revise our disbursements growth estimates downward to nearly 10 per cent CAGR for FY18-20E from nearly 14 per cent earlier, considering the intensifying competition among the UV segment along with SHTF’s non-viability for new vehicles’ financing and higher base of previous year.

Liability challenges leading to increase in cost of funds; pressurize margins: SHTF has replaced a significant chunk of their short term papers with NCDs. The company may not be able to pass on this increase in cost of funds to customers due to static/declining yields. This will lead to margin compression. Accordingly, we reduce our FY20 EPS estimate by nearly 14.2 per cent. With consistent tight liquidity scenario, margins will decline to nearly 7.24 per cent for FY20E from nearly 7.4 per cent in FY19E.

Asset quality may dip; credit costs to rise: Due to slowing auto demand (especially from MHCVs) and rural distress, we believe SHTF remains exposed to risky customer profiles as a result of the large size of their rural book (nearly 36 per cent) and a driver-owner customer base. We anticipate SHTF to report higher credit costs in FY20E.

Outlook and valuations: In our view, the aforementioned challenges should take a relatively larger toll on the company due to its riskier product and customer profiles along with a weak liability franchise. This is expected to put SHTF in slower growth lane over the medium to long term. We revise our TP to Rs1,181 from Rs1,368 earlier (nearly 1.5x P/B FY20E). Maintain our UW stance in our EAP – NBFCs. Key risks include an improvement in the rural scenario due to good rains, regulatory risks and better management of the driver-owner portfolio.


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