Motilal Oswal
Shriram Transport Finance (Buy)
CMP: ₹1,046.05
Target: ₹1,300
Our analysis of Shriram Transport Finance’s FY19 annual report indicates that the company has diversified its borrowing mix by raising ₹10,000 crore from ECBs and retail NCDs (largely equal). But, these sources have been more expensive — the total landed cost of ECBs is about 10 per cent, while that of retail NCDs is 9-10 per cent. In addition, securitisation deals have become dearer — the interest cost range of assets of 48-60 months maturity (which comprise half of total sell-downs) increased to 8.3-10.4 per cent in FY19 from 6.9-8.2 per cent in FY18.
With tight liquidity and calibrated disbursements, we expect assets under management growth to pick up only in 2HFY20. Margins should remain largely stable. Asset quality trends will have to be closely monitored, and thus, credit costs in FY20. We have cut estimates by 10 per cent+ for FY20-22 due to lower AUM growth and pressure on margins. Maintain ‘buy’ with a target price of ₹1,300 (1.4x June 2021 BVPS).
Risks: Asset quality is a key monitorable — increase in write-offs as well as Stage-2 assets in the past two years has been a cause for concern.