S&P Global revises outlook on Shriram Transport to negative
The rating agency expressed concerns over asset quality concerns and pressure on profitability A revision in outlook comes after slowdown in commercial vehicle sales hit NBFCs, making it difficult for these companies to raise funds
Mumbai: Standard & Poor Global Ratings on Monday said that it has revised its outlook on Shriram Transport Finance Co ltd to negative from stable on concerns of asset quality deterioration and pressure on profitability. However, the rating agency maintained the company’s rating at BB+ long term and B short term rating.
“We revised the outlook to negative to reflect the increased risk of a deterioration in STFC's asset quality, which could also affect availability of credit to the company over the next 12 months or so," it said.
A revision in outlook comes after slowdown in commercial vehicle sales hit NBFCs, making it difficult for these companies to raise funds.
The rating agency also added that it expects the company’s growth and profitability to remain under pressure, given tight funding conditions. For the half-year ended 30 September 2019, STFC's assets under management increased about 4% year-on-year, with growth coming mainly from securitization and direct assignment, while balance sheet assets showed a de-growth. The company has about ₹4,500 crore in cash and bank balances at the end of second quarter.
According to S&P, STFC’s stage 2 loans increased to 22% as of September 2019 from 19% as of March 2019. The company's stage 3 loans, which are 90 days overdue, also increased to 8.8% as of Sept. 30, 2019, from 8.4% as of March 31, 2019.
“We believe challenging operating conditions could result in a higher transition rate from stage 2 to stage 3 loans, resulting in an increase in STFC's nonperforming loans and credit costs. The company is holding about 34% of provisions against stage 3 loans and 6% against stage 2 loans. In our opinion, STFC may have to step up this provisioning in a weaker environment," it said.
According to the rating agency, STFC’s funding and liquidity situation remains adequate with the company continuing to have access to several funding sources. S&P said that it will downgrade STFC only if the company's asset quality deteriorates with stage 3 loans rising to 11%-12% and a sharp increase in credit costs.
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