Shriram Transport Finance?s (STFL) AUM and NIM expanded sequentially after two and six quarters of compression, respectively. NPLs picked up a bit but more because of productivity being hampered by the election.
Management sounded positive about fundamentals and H2. Key earning drivers have a significant scope to improve and its valuation is attractive. Q1 PAT was 9% ahead of MSe, driven by higher NII and lower costs, partially offset by higher provisions. NIM improved 8 bps q-o-q to 6.54%. This was driven by lower cash and investment balances and lower cost of funds. This follows a decline of ~120 bps over the past six quarters.
The company?s management expects NIM to improve gradually. We forecast average annual NIM to remain stable in Fy15 at 6.7% and improve to 7% in FY16-17. AUM growth slowed further to 4% y-o-y from 7% y-o-y, but it was up 2% q-o-q after two quarters of decline.
Management sounded confident on the business environment and expects H2 to receive a push from the infra and mining sectors. We have raised FY15e AUM growth to 11% from 9%; F16e / F17e are unchanged at 20 / 21%.
The management has re-aligned business among field executives by geography against by product previously. This has helped them avoid hiring to replace natural attrition (headcount down 6% q-o-q). Credit costs were higher sequentially at 2.2% against 1.8%. As per the management, collections were affected by election. GNPAs rose 7% q-o-q. Coverage was stable q-o-q at 80%.
Profitability is at cyclical lows ? could improve significantly; we find valuation attractive. We see EPS CAGR of 24% in F14-17e and average ROE of 18%.
We expect some improvement in NIM from the current low levels and expect asset quality to improve in Fy15. We expect a pronounced earning recovery in FY16 as the CV cycle picks up. Balance sheet is strong with NPL coverage at 80% and Tier I ratio at 17.6%.
Morgan Stanley
