Strong quarter amidst challenges February 01, 2016 Nitin Kumar nitinkumar@plindia.com +91 22 66322236 Pritesh Bumb priteshbumb@plindia.com +91 22 66322232 Rating BUY Price Rs844 Target Price Rs1,025 Implied Upside 21.4% Sensex 24,871 Nifty 7,564 (Prices as on January 29, 2016) Trading data Market Cap. (Rs bn) 191.6 Shares o/s (m) 226.9 3M Avg. Daily value (Rs m) 512.8 Major shareholders Promoters 26.05% Foreign 52.91% Domestic Inst. 1.66% Public & Other 19.38% Stock Performance (%) 1M 6M 12M Absolute (0.4) (1.0) (27.2) Relative 4.2 8.8 (11.0) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2017 71.4 73.5 3.0 2018 85.4 92.3 7.5 Price Performance (RIC: SRTR.BO, BB: SHTF IN) (Rs) 1,400 1,200 1,000 800 600 400 200 0 Jan 15 Mar 15 Source: Bloomberg May 15 Jul 15 Sep 15 Nov 15 Jan 16 SHTF reported strong earnings with net profits growing 20% YoY (~9% ahead of PLe) led by 44bp QoQ expansion in reported margins and 5% QoQ growth in overall AUMs on the back of festive season demand. NII grew 24% YoY (9% QoQ) aided by moderation in funding cost even as the lending yields remain broadly stable. Asset quality deteriorated slightly as rural market remains challenging leading to 8.4% QoQ rise in GNPLs at Rs25.4bn (180dpd basis). Management indicated that GNPL ratio will increase close to 6.5% as it migrates to 150dpd NPL recognition norm and reports consolidated asset quality numbers in next quarter. We fine tune our numbers and revise our PT to RS1,025 (from Rs1,100) based on 2.3x Sep 2017E ABV. AUM growth pick up to 17% YoY: AUM growth picked up to 17% YoY in a seasonally strong quarter led by strong growth of 38% YoY in HCV segment & growth of 23% YoY in passenger segment. SHTF has also witnessed continued growth in the demand for new vehicles the share of which in total AUMs increased by 50bp QoQ to 8.3%. Overall, disbursement was mainly led by HCVs, tractors & passenger vehicle. Management has maintained its AUM guidance of more than 15% YoY for FY16. Asset quality deteriorates slightly; coverage ratio yet improves: GNPAs increased by 8.4% QoQ to Rs25.4bn (180 dpd) however healthy provisioning run rate (credit cost of 2.6%) enabled flattish trend in Net NPLs and further increase in coverage ratio to 80%. SHTF suggested that rural markets continue to remain under pressure while there has been slight pick up in urban demand and decline in fuel prices have helped improve profitability of its borrowers. Collections in CE business remains unchanged at Rs700 800 mn per month but management said it will take decision on re possession of vehicle going ahead to reduce NPAs. Migration to 150dpd in Q4FY16; high coverage will help limit P&L impact: SHTF has maintained high PCR of ~80% which it plans to drawdown as it moves towards 150dpd norm in Q4FY16 and merge the CE book with itself. Management indicated that GNPL ratio will increase to ~6.5% as it migrates to 150dpd NPL recognition norm and reports consolidated asset quality numbers in next quarter. We maintain BUY with revised PT of Rs1,025 based on 2.3x Sep 17E ABV. Key Financials (Y/e March) 2015 2016E 2017E 2018E Net interest income (Rs m) 30,572 36,917 43,895 52,778 Growth (%) 41.6 20.8 18.9 20.2 Non interest income (Rs m) 4,279 4,407 4,892 5,528 Operating Profit (Rs m) 31,315 35,807 41,712 49,676 PAT (Rs m) 12,378 13,998 16,190 19,383 EPS (Rs) 54.6 61.7 71.4 85.4 Growth (%) 1.1 5.7 25.1 42.6 Net DPS (Rs) 8.5 10.0 11.0 12.0 Profitability & valuation 2015 2016E 2017E 2018E Spreads / Margins (%) 6.3 6.4 6.5 6.5 RoAE (%) 14.1 14.1 14.1 14.7 RoAA (%) 2.5 2.4 2.4 2.4 P/E (x) 15.5 13.7 11.8 9.9 P/BV (x) 2.1 1.8 1.6 1.3 P/ABV (x) 2.2 2.1 1.9 1.8 Net dividend yield (%) 1.0 1.2 1.3 1.4 Source: Company Data; PL Research Q3FY16 Result Update Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Q3FY16 Financials: Core performance continues to improve Rs in million Q3FY16 Q3FY15 YoY gr. (%) Q2FY16 QoQ gr. (%) Interest income 23,675 20,534 15.3 22,402 5.7 Interest expenses 12,239 11,351 7.8 12,059 1.5 Net Interest Income 11,436 9,183 24.5 10,343 10.6 Securitisation income 1,567 1,341 16.9 1,595 (1.8) Total Net Interest Income 13,002 10,524 23.5 11,938 8.9 Operating & Other Income 193 151 28.2 190 1.6 Net revenue 13,195 10,675 23.6 12,128 8.8 Operating expenses 3,287 2,702 21.7 3,001 9.5 Staff Cost 1,466 1,069 37.1 1,311 11.8 Operating profit 9,909 7,973 24.3 9,127 8.6 Provision for bad debts 4,199 3,269 28.5 3,984 5.4 Profit before tax 5,710 4,704 21.4 5,143 11.0 Tax 1,959 1,580 24.0 1,761 11.2 Profit after tax 3,751 3,125 20.0 3,382 10.9 Busines mix Total AUM 6,65,383.5 5,70,712.9 16.6 6,32,529.0 5.2 on book 5,83,926.6 4,89,942.4 19.2 5,50,877.0 6.0 off book 81,456.9 80,770.5 0.8 81,652.0 (0.2) Used CV book 6,09,462.3 5,16,148.0 18.1 5,82,744.0 4.6 New CV book 55,435.1 47,845.0 15.9 49,426.0 12.2 Used CV book share 92% 90% 1.2 92% (0.5) Disbursement 1,04,790.0 89,970.0 16.5 95,061.9 10.2 Used CVs 91,780.0 83,690.0 9.7 85,383.9 7.5 New CVs 13,010.0 6,280.0 107.2 9,678.0 34.4 Asset quality Gross NPA (mn) 25,357.3 17,797.3 42.5 23,386.0 8.4 Net NPA (mn) 5,022.8 3,561.2 41.0 5,029.0 (0.1) Gross NPA (%) 4.29% 3.59% 0.7 4.38% (0.1) Net NPA (%) 0.88% 0.74% 0.1 0.94% (0.1) Coverage ratio (%) 80% 80% 0.2 78% 1.7 Credit Cost (%) 2.59% 2.32% 0.3 2.57% 0.0 Ratios Q3FY16 Q3FY15 YoY bps Q2FY16 QoQ bps Gross Spread (on book) 5.48% 5.99% (51) 5.63% (15) NIM/AUM 8.01% 7.48% 54 7.72% 30 NIM/AUM Reported 7.47% 6.64% 83 7.03% 44 CRAR 18.47% 21.07% (260) 19.19% (72) February 01, 2016 2
STFC Q3FY16 Concall Highlights Management Commentary: Economic conditions remain similar as H1FY16, which has neither deteriorated nor improved. Rural economy has been weak as wages have been slow, income levels have come down but good monsoon and some activity has started which will help rural economy improve. Vehicle utilization remains 22 23 days in the month; crude prices have helped declined fuel costs to slight extent. Geographical performance Problem areas continue to be Mahrashtra esp Marthwada, Telangana, North Karnataka, East UP and Bihar. Vehicle Ban On Delhi HC ban, vehicles are moving out of NCR in neighbouring regions as transfer permit have been allowed which has helped get resale value of 10yrs & above vehicles. In rest of India, there is talk of banning above 15yrs vehicles, but road ministry should give incentive to scrap vehicles which help compensate for buying new vehicles to some extent Business: AUM growth HCVs & PVs continue to add to growth mainly from urban markets. Tractors also saw decent growth as SHTF has been mainly financing used tractors and has been gaining market share. Outlook Growth will be sabove 15% for FY16. For FY17 growth should be similar as FY16 i.e 15%. Margins Margins have improved on reducing cost of funds on better cash management & reduction in base rate. Yields may come down by 20bps more on mix changes. Expect margins to benefit from the MCLR regime from FY17 onwards. Liquidity management Carrying lower liquidity than earlier as SHTF has secured more lenders channels, while in last 4 5 years liquidity crunch has been not severe. Going ahead, would keep liquidity at similar levels and may not go down. Borrowings Have been incrementally borrowing from Bank channels. The share in institutional borrowing of banks & institutions is ~50:50. In Q4FY16, will do higher securitization and have pipeline of Rs20bn 25bn. Private financiers Private financier are like franchises who predominantly do lending in 3W, jeep & PVs with ticket size of 1.25lakh 1.50lakh. These franchises have similar portfolio behaviour as of SHTF s portfolio. Currently these contribute 5% of total AUM. Opex remains elevated as had to do one time provisions of Rs150mn on back of change in bonus act effective from April 2014 February 01, 2016 3
Asset quality: Asset quality deteriorated slightly on some effect from Chennai floods & some from the weak rural activity. Next 3 quarters incl H1FY17 will not see much of change unless rural economy starts improving. Outlook SHTF will move to 150dpd from 180dpd in Q4FY16 which management believes will add 100 150bps additional to GNPA (currently 4.3%) and another Rs8bn 10bn from equipment biz on merger. This will take to GNPA levels to ~6.5% by FY16 end and hit will be minimized on P&L by drawing down PCR but management has not ascertained how much PCR will be dropping. SHTF will retain the strategy of moving towards 90dpd at the end of FY. Shriram Equipment Finance: Asset Quality Collections have been has 80 110crs/month based on 180dpd, while at 40 50crs/month at 150dpd. GNPAs have come down from Rs1100crs to Rs1050crs on 150dpd. By FY16 end GNPAs would come down below Rs1000crs, but trying to recover Rs150 200crs more. Rs282crs has been held as provisions AUM Currently, AUM at Rs22.5bn or 3.3% of consolidated AUM. Exhibit 2: AUM growth led by traction in HCVs and passenger vehicles 5 4 3 2 1 AUM growth On book growth Exhibit 3: AUM growth led by both Used CVs & New CVs, but mix remain unchanged 4 2 2 4 6 Used CVs growth New CVs growth February 01, 2016 4
Exhibit 4: Strong disbursements were seen in New CVs, while used CVs continue to grow stable Disbursement growth 60% 50% 40% 30% 20% 10% 0% 10% 20% Exhibit 5: Margins improve sharply on back of effective cash management and benefit from lowered bank s base rate 8.50% 8.00% 7.50% 7.00% 6.50% 6.00% NIM (%) 4Q12 Exhibit 6: Opex rate though elevated remained stable sequentially 35.0% 3 25.0% 2 15.0% 1 5.0% 5.0% 1 15.0% Opex growth 4Q12 February 01, 2016 5
Exhibit 7: Asset quality largely stable; slight impact from TN floods and weak rural activity 5.0% 4.0% 3.0% Gross NPA (%) Net NPA (%) Exhibit 8: Credit cost remains high as SHTF maintains 80% PCR; utilization of PCR in Q4FY16 as it moves to 150dpd 3.0% 2.5% 2.0% Credit cost (%) 2.0% 1.0% 1.5% 3Q12 4Q12 1.0% 3Q12 4Q12 Exhibit 9: ROE Decomposition (on Assets) ROA Decomposition (on Assets) FY12 FY13 FY14 FY15E FY16E FY17E FY18E Interest income 17.19 15.87 15.80 15.14 14.95 14.77 14.63 Interest expenses 7.30 7.12 8.36 8.09 8.08 7.91 7.80 Net interest income 9.88 8.75 7.43 7.05 6.87 6.86 6.83 Income from securitization 6.21 4.65 2.84 1.42 1.10 1.01 0.92 Other Inc. from operations 0.30 0.42 0.98 0.79 0.69 0.65 0.62 Total income 10.19 9.16 8.41 7.84 7.55 7.52 7.45 Employee expenses 1.10 0.95 0.87 0.79 0.72 0.70 0.68 Other operating expenses 1.23 1.10 1.21 1.28 1.24 1.25 1.21 Operating profit 7.86 7.11 6.33 5.77 5.59 5.57 5.57 Tax 1.85 1.63 1.20 1.11 1.13 1.11 1.12 Loan loss provisions 2.28 2.11 2.44 2.38 2.28 2.29 2.28 Net profit 3.73 3.38 2.69 2.28 2.19 2.16 2.17 Exhibit 10: Earnings estimate change table We tweak our earnings on improving business performance and movement of 150dpd including equipment business Rs mn Old Revised % Change New FY16E FY17E FY16E FY17E FY16E FY17E FY18E Net Interest Income 40,089 48,132 43,958 51,433 10 7 60,956 Operating Profit 37,636 45,200 35,807 41,712 (5) (8) 49,676 Net Profit 13,517 16,915 13,998 16,190 4 (4) 19,383 EPS (Rs) 59.6 74.5 61.7 71.4 4 (4) 85.4 ABVPS (Rs) 435.8 466.2 394.2 435.0 (10) (7) 472.2 Price Target (Rs) 1100 1025 7 Reco BUY BUY February 01, 2016 6
Exhibit 11: We revise our TP to Rs1,025 based on 2.3x Sep 17 ABV from Rs1,100 as we factor in the movement to 150dpd and GNPAs of Shriram equipment to remain high post merger Fair price EVA 1,046 Fair price P/ABV 1,005 Average of the two 1,025 Target P/ABV 2.3 Target P/E 13.1 Current price, Rs 836.8 Upside (%) 23% Dividend yield (%) 1% Total return (%) 24% Exhibit 12: SHTF Historical P/ABV trends 3.5 P/ABV 3 yr avg. avg. + 1 SD avg. 1 SD 3.0 2.5 2.0 1.5 1.0 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 February 01, 2016 7
Income Statement (Rs m) Int. Inc. / Opt. Inc. 74,472 88,653 103,131 122,371 Interest Expenses 43,900 51,736 59,236 69,594 Net interest income 30,572 36,917 43,895 52,778 Growth (%) 41.6 20.8 18.9 20.2 Non interest income 4,279 4,407 4,892 5,528 Growth (%) (6.9) 3.0 11.0 13.0 Net operating income 42,547 48,365 56,325 66,484 Expenditure Employees 4,296 4,597 5,240 6,026 Other expenses 6,531 7,511 8,863 10,192 Depreciation 405 451 510 590 Total expenditure 11,232 12,558 14,613 16,808 PPP 31,315 35,807 41,712 49,676 Growth (%) 5.2 14.3 16.5 19.1 Provision 12,892 14,598 17,182 20,307 Other income Exchange Gain / (Loss) Profit before tax 18,424 21,208 24,530 29,368 Tax 6,046 7,211 8,340 9,985 Effective tax rate (%) 32.8 34.0 34.0 34.0 PAT 12,378 13,998 16,190 19,383 Growth (%) (2.1) 13.1 15.7 19.7 Quarterly Financials (Rs m) Y/e March Q4FY15 Q1FY16 Q2FY16 Q3FY16 Int. Inc. / Operating Inc. 21,364 22,015 22,402 23,675 Income from securitization 1,376 1,464 1,595 1,567 Interest Expenses 11,886 11,972 12,059 12,239 Net Interest Income 9,478 10,043 10,343 11,436 Growth 48.8 39.3 31.4 24.5 Non interest income 160 148 190 193 Net operating income 11,014 11,655 12,128 13,195 Growth 17.6 17.6 18.5 23.6 Operating expenditure 2,991 2,905 3,001 3,287 PPP 8,023 8,749 9,127 9,909 Growth 16.3 18.3 19.1 24.3 Provision 3,241 3,959 3,984 4,199 Exchange Gain / (Loss) Profit before tax 3,241 3,959 3,984 4,199 Tax 1,615 1,579 1,761 1,959 Prov. for deferred tax liability Effective tax rate (%) 49.8 39.9 44.2 46.7 PAT 3,167 3,211 3,382 3,751 Growth 7.4 4.8 11.9 20.0 Balance Sheet (Rs m) Sources of funds Equity 2,269 2,269 2,269 2,269 Reserves & Surplus 90,111 104,108 120,298 139,681 Networth 92,380 106,377 122,567 141,950 Growth (%) 11.7 15.2 15.2 15.8 Loan funds 442,758 513,359 613,399 745,559 Growth (%) Others Minority Interest Deferred Tax Liability Total 535,138 619,736 735,967 887,509 Application of funds Net fixed assets 1,007 1,064 1,116 1,172 Advances 507,638 588,571 695,585 838,430 Growth (%) 30.5 15.9 18.2 20.5 Net current assets (10,275) (10,297) (5,002) (1,444) Investments 33,272 36,599 40,259 45,090 Growth (%) 22.1 10.0 10.0 12.0 Other Assets 3,496 3,799 4,008 4,261 Total 535,138 619,736 735,967 887,509. Key Ratios CMP (Rs) 844 844 844 844 Eq. Shrs. O/s. (m) 227 227 227 227 Market Cap (Rs m) 191,566 191,566 191,566 191,566 Market Cap to AUM (%) 35.8 30.9 26.0 21.6 EPS (Rs) 54.6 61.7 71.4 85.4 Book Value (Rs) 407.1 468.8 540.2 625.6 Adjusted Book Value (Rs) 390.4 394.2 435.0 472.2 P/E (x) 15.5 13.7 11.8 9.9 P/BV (x) 2.1 1.8 1.6 1.3 P/ABV (x) 2.2 2.1 1.9 1.8 DPS (Rs) 8.5 10.0 11.0 12.0 Dividend Yield (%) 1.0 1.2 1.3 1.4 Asset Quality Gross NPAs (Rs m) 18,941 40,317 53,004 69,590 Net NPAs (Rs m) 3,791 16,933 23,852 34,795 Gross NPAs to Gross Adv. (%) 3.7 6.9 7.6 8.3 Net NPAs to Net Adv. (%) 0.8 2.9 3.4 4.2 NPA Coverage (%) 80.0 58.0 55.0 50.0 Profitability (%) NIM 6.3 6.4 6.5 6.5 RoAA 2.5 2.4 2.4 2.4 RoAE 14.1 14.1 14.1 14.7. February 01, 2016 8
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