Shriram Transport Finance gets its game right on asset quality, growth in Q3
The company reported a sequential decline in delinquencies to ₹8170 crore for the December quarter. Total gross stage three assets were just 7.1% of the loan, a sequential drop of 15 basis points from the September quarter.
Used vehicle and fleet financier Shriram Transport Finance Company Ltd got it right in the December quarter with asset quality and growth, something that investors appreciated by driving its stock up 13% today.
The company reported a sequential decline in delinquencies to ₹8170 crore for the December quarter. Total gross stage three assets were just 7.1% of the loan, a sequential drop of 15 basis points from the September quarter. This is taking into account the benefit from judicial standstill on bad loan recognition. Further, in its interaction with analysts today, the management said that outlook on asset quality is improving. In short, the lender has turned a corner on asset quality and that augurs well for future profitability given incremental provisioning needs would reduce.
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For the December quarter though, the company increased its provisioning by 52% to ₹674.7 crore which led to the 17% year-on-year drop in net profit. The lender said that its restructured loan pile is only 2% of its book, which is also another relief. Essentially, the company’s customers didn’t need easier terms to tide over the pandemic’s impact.
Another metric that has impressed investors is the growth in disbursements. Shriram Transport Finance reported 11% increase in disbursements led mainly by loans towards used commercial vehicle purchases. Indeed, the recovery in the economy has benefited the lender immensely in the third quarter. Disbursements are not only back to pre-covid levels, but some categories showed faster growth as well. Used commercial vehicle loans drove the growth by expanding 13% year-on-year. Recall that total disbursements were just 65% of pre-covid levels in the September quarter. On an asset under management basis, the growth was a modest 6% but an improvement nevertheless from previous quarters. Analysts at JM Financial expect AUM to grow by 11% over FY21-23 period on a compounded annual growth rate basis.
But a non-bank financial company’s biggest strength is borrowing at reasonable rates if not cheap. Shriram Transport Finance’s cost of funds declined sequentially which aided margins. The company was able to mobilise more retail deposits during the quarter. Its market borrowings too benefited from lower bond yields. “Given its leadership position in the used CV segment, SHTF is well-placed to capitalise on CV cycle recovery going forward," wrote analysts at JM Financial in a note. Including today’s gains so far, the lender’s shares have surged by a dizzying 83% in the past three months. With quarterly performance expected to strengthen further, valuations have gotten credence.
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