Shriram Transport Finance Co. (3QFY15) : RoA improvement imminent. Maintain BUY :: HDFC Securities

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SHTFs core earnings ( 11% YoY) and operating profits ( 9% YoY) were in line with estimates. However, higher provisions (ann. 2.3%) led to the PAT ( 3% YoY) coming in marginally below estimates. Key positives include third consecutive quarter of NIM improvement, stable asset quality and improving growth trends.

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RoA improvement imminent
SHTF’s core earnings (+11% YoY) and operating
profits (+9% YoY) were in line with estimates.
However, higher provisions (ann. 2.3%) led to the
PAT (+3% YoY) coming in marginally below
estimates. Key positives include third consecutive
quarter of NIM improvement, stable asset quality
and improving growth trends.
SHTF is at the inflexion point and remains the
preferred play on the anticipated CV cycle revival.
Further positives are improving macros, falling
interest rates and a better earning profile of its
borrowers. We thus expect SHTF’s RoA to inch back
to +3.1% from 2.5/2.9% in FY15E/14. Niche business
segment (used CVs), higher market share and a well
cushioned B/S (CRAR: 21% & PCR: 80%) too provide
comfort. Maintain BUY with a TP of Rs 1,248 (2.3x
FY17E ABV).
 Led by a sharp pick-up in disbursements (+40/10%
YoY/QoQ), SHTF’s AUM grew ~6.7/2.5% YoY/QoQ to Rs
570bn. Used CV segment (91% of AUM) grew 14% YoY,
while the new CV portfolio continued its downward
trajectory (down 32/8% YoY/QoQ). Management hinted
at a gradual pick up in business, initially led by HCVs
(41% of the AUM). With a pick-up in macros, favorable
base & +25% market share in used vehicles, we believe
SHTF is well placed to deliver a ~14% AUM CAGR over
FY14-17E.
 Sharp decline in funding cost and a marginal pick-up in
business led to the NIM improvement (6.6%, 4bps QoQ
and 18bps FYTD). As 56% of the borrowings are floating
in nature and are expected to be re-priced in FY16,
SHTF’s CoF would further drive a NIM expansion. With
a fixed nature of its asset book, we expect NIMs to
improve by ~80bps (FY14-17E) to 7.2%.
 Asset quality was stable with GNPA increasing a mere
6% QoQ to Rs 17.8bn (3.6%). Coverage improved QoQ
to 80% and thus NNPA increased by a mere 2% to Rs
3.6bn (0.74%). We believe a gradual improvement in
macros and the fall in diesel prices augurs well for
SHTF’s borrowers; thus, we expect an improving asset
quality trend going ahead. We factor GNPA of 3.7%
over FY15-17E. With a higher coverage ratio, SHTF is
one of the better placed CV financiers for a gradual
transmission to 90-days NPA recognition.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010934