Shriram Transport Finance: a year of single digits
The fourth quarter results of Shriram Transport Finance Co. Ltd (STFC), a non-banking finance company engaged in commercial vehicle finance, were discouraging. The transition to recognizing non-performing assets (NPA) to 120 days from 150 days has hit it hard. Note that NPA recognition from the March 2016 quarter to the December 2016 quarter was maintained on the basis of 150 days.
Accordingly, its net profit dropped to about Rs150 crore from over Rs300 crore each in the first three quarters of financial year 2017. In fact, March quarter gross NPAs increased 25.6% compared to the December quarter, slightly higher than expectations.
The good news is: the impact of demonetisation seems to be waning, says the firm. Hints of recovery post demonetisation are visible. For instance, disbursements increased 29% sequentially, though they were 17% lower compared to the same period last year. But the base was higher in last year’s March quarter. Assets under management (AUM) grew at 8%, far slower than the 15% growth seen in the December quarter.
But it’s not just the March quarter. On the whole, STFC’s financial year 2017 performance was nothing to write home about. As analysts from Antique Stock Broking Ltd point out, FY17 could best be described as a year where everything revolved around single digits—AUM grew 8%, income grew 8% and earnings grew 7%. Growth was impacted by general slowness in the Indian economy, discontinuing of finance for vehicles older than 10 years, and demonetisation. As such, Shriram Transport reported its lowest-ever profitability in the last 10 years (return on assets of 1.6%), said Antique in a report on 28 April.
True, the stock has recovered from its low after demonetisation but it has still underperformed the S&P BSE 100 index. While valuations don’t look expensive, the outlook for the share is dull. Analysts from Emkay Global Financial Services Ltd point out that Shriram Transport’s valuations at 2 times financial year 2019 expected price-to-adjusted book value appears cheap (relative to peers), but that needs to be seen in the context of the asset quality overhang and relatively weak return ratios. The brokerage has cut its financial year 2018-2019 earnings estimates by about 15% each and maintains its “reduce” call on the stock.
Emkay’s key concerns are: large balance sheet size constraining growth/margins, slower pace of recoveries resulting in elevated non-performing loans and credit costs; and regulatory costs weighing down on return ratios. This year, STFC aims to clock 12-15% AUM growth. Improvement in the rural economy and pick-up in infra spending should help in achieving that target.