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Shriram Transport Finance expects that it would be able to collect repayments from 90% of its customers by the end of this month. (Mint)
Shriram Transport Finance expects that it would be able to collect repayments from 90% of its customers by the end of this month. (Mint)

Unlocking brings cheer for Shriram Transport investors; worries remain

The company is betting on its rural reach and exposure to overcome the impact of the pandemic

Shares of Shriram Transport Finance Co. Ltd have surged nearly 10% in the past three trading sessions. Behind this cheer is the company’s update on its business and guidance announced last week.

In a release, the company said it expects to collect repayments from 90% of its customers by the end of this month. It also said that it may not see more than 2% of its loan book going for restructuring.

“(We are) positive on upcoming festive season, given the strong rural and semi urban demand, good consumer demand and traction in e-commerce and related logistics players," it added.

The company is betting on its rural reach and exposure to overcome the impact of the pandemic. Indeed, early signs of a pick-up in tractor sales and better other commercial vehicles sales point to a faster recovery.

Signs of normalcy
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Signs of normalcy

Analysts said the lender’s provisions for covid-19 risks along with the recent boost in capital also helps.

“Shriram Transport Finance is well positioned to participate in any recovery...given its strengthened balance sheet with covid-19 provisions and 1,500 crore rights issue taking Tier-1 capital ratio to 20%," wrote analysts at JM Financial Institutional Securities Ltd in a 13 August report.

Note that the rights issue was priced at 570 apiece which was a discount of 17% on the prevailing market price, besides a marginal discount to its estimated book value for FY21. More than anything else, subdued valuations seem to be working for the company’s shares.

But it is not fully out of the woods yet. Shriram Transport Finance lends to large transport fleet operators, as well as small owners, who own and operate trucks. Large fleet operators have been hit hard due to the pandemic, especially operators of fleets of private buses and other commercial vehicles. With schools shut, these bus operators are having a tough time.

As a 31 August article in Mumbai Mirror said, many of these operators are not able to repay lenders regularly. Regional lockdowns are making it difficult for transport operators to carry out their operations.

The implications of these on asset quality of the transport financier cannot be ignored. As such at the end of June quarter, Shriram Transport Finance had reported a bad loan pile of 8,931 crore. A provision coverage ratio of 39% gives only limited comfort. Above all this, the company needs to deftly manage its asset liability. Cost of borrowing for the lender hasn’t come down in a big way despite surfeit liquidity and measures by the Reserve Bank of India. Analysts don’t see much relief on cost of funds for the company.

Perhaps this lingering worry explains why its shares are still 53% off the peak seen in February.

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