Shriram Transport's (STFC) disbursements in Q3 FY14 de-grew by 9% yoy led by steep fall of 86% yoy in new CV loan disbursements. The amount of fresh new CV loans disbursed stood at muted Rs1.6bn tracking the anaemic demand for new CVs in the economy. Used CVs disbursements growth nosedived from 32% yoy in Q2 FY14 to 6% yoy reflecting increased challenges around vehicle utilization due to prolonged economic slowdown. The share of used CV loans in the overall disbursements continued to increase and reached 97.5%.
On account of sluggish disbursements, STFC's AUM growth decelerated to 15% yoy from 22% yoy in the previous quarter. Tracking the trend in disbursements, the AUM mix continued to shift towards used CVs loans, the share of which reached 85%. Heavy commercial vehicle financing comprised 40% of financed assets. Securitized book stood at 29% of the AUM, but its contribution is likely to jump in the current quarter due to seasonal uptick in demand for PSL loans. As we believe that STFC's disbursements would remain sluggish in the medium term due to sustained weak demand for both new and used CVs, the AUM growth is expected to moderate further. We estimate AUM growth to be at 12-14% for current as well as next fiscal.
STFC's NIM contracted by 20bps qoq to 6.5%, a multi-quarter low. This came as a negative surprise as we were expecting margin to improve as was guided by the management in Q2 FY14 earnings call. Our calculations suggest that lending yield improved sequentially on the back of increasing share of used CV loans and that the funding cost marginally inched up qoq. With no increase in AUM during Q3 FY14, the company had to carry the excess liquidity maintained during Q2 FY14 which impacted NIM negatively. As the funding cost is likely to have peaked out, we expect a gradual recovery in margin over coming quarters driven by deployment of surplus liquidity and further improvement in the lending yield. Management intends to sustain NIM near 7% in the longer term.
Opex growth rose to 20% yoy on account of branch expansion and intensified recovery efforts. This along with margin contraction resulted in deterioration of cost/income ratio which increased to 25.7%. STFC intends to slow down its pace of overall network expansion while continuing to open low-cost centres in rural areas.
As expected, asset quality deteriorated with Gross NPL ratio increasing to 3.6%. Over the past 12 months, it has materially increased by 70bps (53% in absolute terms). With STFC making provisions commensurately (annualized credit cost at 226bps), the Net NPLs inched-up only by 8bps qoq and the coverage ratio was maintained at a higher level of 80%. We expect company's asset quality to continue to exhibit stress in the medium term and therefore credit cost will remain elevated. Higher provisioning would depress earnings growth and preclude RoA improvement despite NIM recovery.
Factoring the disappointing Q3 FY14 operational performance and moderating our NIM assumptions, we cut STFC's earnings estimates for FY14/15 by 6-10%. However, we retain BUY rating on the company as current inexpensive valuation (1.4x FY16 P/ABV) largely captures the anticipated modest earnings/RoA trajectory in the medium term.
|(Rs mn)||Q3 FY14||Q2 FY14||% qoq||Q3 FY13||% yoy|
|Total Interest Income||20,323||19,511||4.2||16,771||21.2|
|Net Interest Income||9,794||9,606||2.0||9,353||4.7|
|(Rs bn)||Q3 FY14||Q2 FY14||% qoq||Q3 FY13||% yoy|
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