Shriram Transport Finance Stock Analysis

Shriram Transport Finance Q4 FY20 Financial Highlights

Introduction

Shriram Transport Finance Stock, a flagship company of Shriram Group and a leader in pre-owned vehicle financing, is facing a challenging situation amid current COVID pandemic. It is mainly due to the Standstill economic activities during the nationwide lockdown, which have adversely affected the cash flows of the company’s borrowers.

Lets do a detailed stock analysis with Q4 FY20 Financial Highlights of Shriram transport Finance Company Ltd in this article.

Shriram Transport Finance Stock Analysis

Company Overview

• Shriram Transport Finance Company Ltd (STFC) is India’s Largest Player in Commercial Vehicle Finance. It is a leader with a niche presence in Financing Pre-owned trucks & Small Truck Owners.
• The company is incorporated in 1979 and is a Flagship company of Shriram Group.
• Over the past 39 years, the company has built a strong diversified portfolio which includes :
  1. Pre-owned CV Financing (Second-hand vehicle financing)
  2. New CV Financing
  3. Passenger Vehicles
  4. Multi-utility vehicles
  5. Finance for 3-Wheeler, Tractors, Construction Equipment
  6. Company also extended the Finance for Tyres, Engine Replacement & Working Capital
• STFC is having PAN-India presence with a strong branch network of 1,758 branches. The Company has built a strong Customer base of 21.2 Lakh as on Mar-20

Q4 FY20 Financial Highlights

Net Interest Income (NII)

• NII is a very important parameter for analysing the core business growth of the banking or NBFCs.
• Net Interest Income = (Interest Income – Interest Expenses)
• Net Interest Income (NII) deteriorated QoQ and flat YoY. NII is at Rs.1,918 Cr in Q4 FY20 versus Rs.1,903 Cr in Q4 FY19.
• The QoQ decline in NII is very significant 6% from Rs.2,037 Cr in Q3 FY20 mainly on account of moderate loan growth, resulting in dampened Interest Income.

Operating Profit (PPOP)

• Pre-provisioning Operating Profit (PPOP) has reported a declines of 2.6% YoY and 9.7% QoQ mainly on account of :
  1. Eroded Net Interest income (Flat YoY & -6% QoQ)
  2. Subdued Operating Income (2.1% YoY & -5.9% QoQ)
  3. Rise in Operating Expenses (20% YoY & Flat QoQ)

Total Provisions

• Total Provisions were up 154% QoQ and by 109% YoY to Rs.1,129 Cr in Q4 FY20.
• Of the total provisions, COVID-Related provisions were Rs.918 Cr, while the Provisions against Stressed Assets were Rs.211 Cr in Q4 FY20.
• Thus the higher COVID-related provisions is made in current uncertain economic outlook due to COVID pandemic.

Net Profit

• Shriram Transport Finance posted a 70% decline in its net profit at Rs.223 Cr for the Q4 FY20. It had posted profit of Rs.746 Cr in the year-ago quarter (Q4 FY19). The QoQ decline in PAT is 75% from Rs.879 Cr in Q3 FY20.
• For the fiscal year 2019-20 ie. FY20, net profit declined 2.4% to Rs.2,502 Cr from Rs.2,564 Cr in FY19

COVID Impact on Profitability

Lets analyse how the higher COVID- provisions affected the profitability of the company in Q4 FY20 and FY20.

• The large COVID-19 provision (Rs.1,129 Cr) dragged down the net profit in Q4 FY20 YoY from Rs.746 Cr in Q4 FY19 to Rs.223 Cr in Q4 FY20.
• Without Considering COVID-19 Impact, PAT for Q4 FY20 would have been Rs.891 Cr, thus posting a 19.4% YoY growth from Rs.746 Cr in Q4 FY19.

Assets under Management (AUM) Mix

• AUM growth in Q4 FY20 was mainly driven by :
  • Used vehicles  (86% of the portfolio) and
  • Working capital loans (Strong Growth QoQ as well as YoY)
• New vehicle Loan book (9% pf the portfolio) is declining continuously & its outlook is expected to remain dampened due to low fleet utilization of existing Commercial Vehicles and the postponed purchasing of Passenger Vehicles amid COVID uncertainties.

Key Ratios

• Due to the moderate Loan growth (lower interest income) and the higher Income Expenses, Net Interest Margin (NIM) eroded from 7.23% in Q4 FY19 to 6.76% in Q4 FY20.
• In the same way, Cost to Income ratio jumped to 25.47% in Q4 FY20 due to the higher Credit cost and subdued income growth.
• As a result, both Return on Assets (ROA) and Return on Equity (ROE) declined drastically in Q4 FY20 QoQ as well as YoY.

Capital Adequacy Ratio (CAR) – A key Positive Indicator

• The Capital Adequacy Ratio of the company is continuously improving QoQ since Q1 FY20.
• In Q4 FY20, CAR climbed to 21.99% even after bearing the COVID Impact. Considering Pre-COVID scenario CAR would have been at 22.56% in Q4 FY20.

Asset Quality

• Asset Quality Improved in Q4 FY20 with a decline of 36 bps in Gross NPA & 47 bps in Net NPA
• NPA numbers are declining consistently since Sept-19, which is a positive sign.
• One-time Provisioning for Potential Impact of COVID-19 : Rs.918 Cr
• High level of Moratorium by value (70%)
• Though asset quality is improved in Q4 FY20, the future looks uncertain due to the COVID pandemic.
• So, there will be the risk of increase in Stressed assets due to weakening of overall Economic activity amid COVID uncertainties

Shareholding Pattern (Mar-20)

• Strong FIIs Holding with 64.66% stake as on March-20. STFC is amongst the Top 10 favourite stocks of FIIs in terms of % holding.

• Among the Mutual Funds, HDFC Mutual Fund, Mirae Asset Mutual Fund and Nippon India Mutual Fund hold 0.57%, 0.24% and 0.19% stake respectively.
• The promoter, Shriram Group is having 26.25% stake with no pledging of shares, which is a positive sign.

Valuation

• The stock is down almost 42% year-to-date (from Jan 1, 2020), while the Nifty is declined around 15.5% YTD.
• Thus, the Stock is currently trading at attractive valuation (at 54% discount to Historical Valuation. Current Price to Earnings Ratio (PE Ratio) is 6.2, whereas Historical Median PE is 13.5.
• Also, the current Price to Book Ratio is 0.85, which indicates the share price is 15% lower than its book value.
• However, the Inherent Volatility makes it a stock for Risk-takers or Aggressive investors. Auto Sector is expected to witness high stress in FY21, so the company’s AUM growth is on slow lane.