Last updated: 05 Aug, 2021 | 02:14 pm

Shriram Transport Finance: Higher provisions hit bottomline

Key highlights from Q1 earnings

  • Shriram Transport has reported a 77% on-quarter drop in Net Profit mainly due to higher provisions. Loan losses and provisions doubled in the quarter to Rs 1,434 crore, from Rs 723 crore, denting the company’s bottomline. 
  • The company’s credit costs increased 238 bps on-quarter to 4.9%,  as select segments such as tourism, school buses, passenger vehicles led transport faced challenges due to Covid-19.

A closer look at Shriram Transport’s asset quality

  • Shriram Transport’s Stage 3 Gross NPA rose by 112 bps to 8.18% in the Apr-Jun 21 period, as a lesser number of customers opted for restructuring (1% of book). Stage 3 assets refer to those loans which have seen some kind of a credit event such as default, downgrade, delay, restructuring etc
  • However,  the company has prudently made provisions. Stage-3 coverage ratio stands at 44.2%. This is because Shriram transport has taken conservative approach, and assumed a higher expected credit loss in passenger vehicles. 
  • Shriram transport said that Tourism, school-buses and staff transportation were the most impacted, and hence form the biggest chunk of additional COVID provisions.
  • Write-offs in Apr-Jun 21 stood atr Rs 3,600 crore. The company has guided for the provisions to remain elevated in the next two quarters
  • Net Stage 3 assets rose to 4.74% from 4.22% sequentially. The provision cover on standard (stage 1 & 2 assets) assets has also improved sequentially from 4.1% to 4.3%.
  • During the quarter, Shriram Transport restructured assets to the tune of Rs 342 crore as against Rs 1434 crore of assets approved for the same. The company intends doing a limited Rs 300 crore restructuring in the coming quarters.

What worked for Shriram Transport in the quarter?

  • Despite a challenging quarter, Shriram Transport was able to report a healthy 7% on-year rise in its AUM to Rs 1.19 lakh crore. This was mainly driven by a growth in its Used CV segment (up 13% on-year). 
  • Used vehicle finance segment now contributes to more than  90% of the overall AUM, with its share increasing over the previous quarter. The resale prices of Light Commercial Vehicles and Passenger Cars increased by 20-25% in the quarter, which in turn aided higher disbursements for Shriram Transport. 
  • The company had seen a 16-basis-point improvement in the cost of funds during the quarter and expects a further 10-15 basis points reduction in the September quarter.
  • The company reported an excess liquidity of Rs 17,031 crore. It plans to bring down excess liquidity from Q3. This coupled with a pick-up in growth should impact interest margin positively.
  • Thanks to the QIP of Rs 2000 crore and promoters’ warrant Rs 250 crore, the company has a comfortable capital position with a capital adequacy ratio at 23.27%.
  • The company’s collection efficiency improved to 94% of demand in June, from 87% in May’21. Shriram Transport collection efficiency to pick up further after Sep-21.

Shriram Transport Finance: review and outlook

  • The second wave of the pandemic has impacted the vehicle financing company, as lockdowns were imposed in different parts of the country during the Apr-Jun 21 period. However, this time around, the impact has been less severe than the first wave.
  • Disbursements have bounced back to pre-COVID levels. The company has also clocked a steady growth in its AUM, in light of the challenges. 
  • Given the pent-up demand for used vehicles, the company could see an improvement in growth in the upcoming quarters. Most of the analysts now expect double-digit growth for the year.
  • While asset quality could remain a key overhang till the Covid-19 situation settles, the company has made adequate provisions. The company remains well-capitalized at a tier-1 Capital Adequacy ratio of 21.1%. The management has guided for elevated provisions for the next two quarters and a credit cost of greater than 2.5% for FY22E.
  • With healthy monsoon and a good crop output, Shriram Transport could see a good recovery of its loans. Hence, the company expects credit costs to normalise from FY22E. This should lead to a recovery in profits and return ratios. 
  • Hence, while there are near-term challenges, the business should see improvement in the upcoming quarters.