Home / Markets / Mark To Market /  Shriram Transport Fin’s fundraising helps, but Street seeks more

Used vehicle financier Shriram Transport Finance Company Ltd may have recently beefed up its capital position with an infusion from its parent company with plans to raise more funds this year.

But the more than 7% drop in its share price since the fund-raising shows that investors are awaiting more conviction beyond the fund infusion.

To be sure, the capital infusion by parent Shriram Capital Ltd of 2,000 crore was at 1,430 a piece, a discount of 4% to the prevailing market price. Analysts believe that the fund infusion will have a nominal impact on the company’s growth and profitability. As such, Shriram Transport has a capital adequacy ratio of 22.5% as of March, which is far higher than the regulatory minimum. The capital infusion by the promoter may beef up the ratio by 25 basis points, said analysts at Emkay Global Financial Services Ltd.

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What investors are looking for is a sign that the company may be able to weather the second wave of the pandemic and show recovery similar to FY21. In FY21, the company was able to turn around its asset quality in the second half of the year which was marked by removal of lockdowns.

Of course, moratorium and forbearance helped the lender. Further, Shriram Transport’s bad loans reduced through recoveries and upgrades rather than write-offs. This shows that the company’s risk assessment is sound. In fact, write-offs dropped by 10% for FY21 despite the pandemic. Analysts at Motilal Oswal Financial Services Ltd note that prices of new commercial vehicles would rise given the surge in input costs.

That would increase the appeal of used vehicles, benefiting Shriram Transport Finance directly. “This should aid disbursement growth as well as lead to lower LGDs (loss given default)," they wrote in a note.

The management’s guidance on FY22 is also comforting. Although the lender expects the pandemic-induced lockdowns to impact growth, the management is confident that the hit would be limited to the first quarter. Analysts believe that given the company’s FY21 performance and the newly beefed up capital, the lender would be able to show strong recovery.

“AUM (assets under management) growth has been weak for the past several quarters; however, signs of a sharp reversal are being seen in its core segment of used vehicle financing," the Motilal Oswal note said. The key, of course, is to avoid dodgy quality loans while trying to grow AUM faster. The company has higher exposure to relatively low-income customers who are more vulnerable to lockdowns caused by the pandemic.

While meeting demand as restrictions begin to lift, the lender will need to watch for weak credit and make enough provisions for the risks.

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