Shriram Transport Finance: bad loans keep rising
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Shriram Transport Finance Co. Ltd’s shares have managed to clawback some of their earlier losses, but worries about asset quality deterioration continue to dog the stock.
The gross bad loans ratio climbed to 4.3% in the December quarter, up a notch from the preceding quarter. The stress in the rural economy, floods in Tamil Nadu, and deficient rainfall in Maharashtra and Uttar Pradesh were responsible for the spike in bad loans.
Umesh Revankar, managing director at Shriram Transport Finance, expects gross non-performing loans as a percentage of the loan book to rise to almost 6% in the March quarter. Around 100 basis points of the addition to bad loans will come from the migration to 150 days for non-performing loan recognition from 180 days at present. One basis point is 0.01%.
The merger of the equipment financing business in this quarter will also move up the gross bad loans ratio. There could be some impact on the profit as well because of high provisioning following the merger of the construction equipment business, said Revankar. For the December quarter, provisions remained elevated at Rs.420 crore, up 20% from a year ago.
The silver lining for the company is an increase in disbursements. The management expects assets under management to grow around 16% in the current fiscal year and is optimistic of maintaining similar growth rates in FY17 as well. Total assets under management grew 16.6% year-on-year in the three months ended December from 13.9% growth in the September quarter, led by financing of old and new commercial vehicles.
While January is historically slow for vehicle financing, Shriram Transport Finance expects good demand from northern states and recovery in infrastructure activity to propel disbursement growth. “Loans to new vehicles and light commercial vehicles have grown after three years, indicating that demand is picking up,” said Revankar. Until last quarter, disbursements were mainly being driven by demand for used vehicles.
Stand-alone net profit grew 20% year-on-year to Rs.375 crore. Net interest margins expanded to 7.5%, helped by lower cost of funds and better management of treasury. While the management expects stable margins, there could be some pressure in the March quarter due to an increase in bad loans.
At 1.7 times price-to-book value for FY17, valuations are not expensive. “It should be seen in the context of the asset quality overhang and relatively weak return ratios, which has led to de-rating of the stock. In our view, asset quality improvement remains crucial ,” according to Emkay Global Financial Services Ltd in a note dated 1 February.