53
(^) Outlook BUSINESS / (^) 22 December 2017
We believe the worst of SHTF’s asset quality trou-
bles are behind and the fi rm should witness im-
proving return ratios on lower credit costs. We ex-
pect return on asset (RoA) and return on equity
(RoE) of 3 % and 17 %, respectively, in FY 19 and be-
yond. With RoA of 3 %, Shriram Finance will be at
the upper-end of the RoA range of our NBFC cover-
age universe.
Aft er six years of no-profi t growth, we expect 30 %
profi t CAGR over FY 17 - 20. Additionally, we believe
the margin compression fears are overplayed as
the company is yet to reap signifi cant benefi ts in
its cost of funds.
We acknowledge that the company’s fortunes
are tightly linked to economic growth. Yet, given
its niche and diffi cult-to-replicate business mod-
el, virtual monopoly in old vehicle fi nancing, AUM
growth rate and steady-state of ROE, Shriram
Finance has enough scope for a rerating. b
The writer, in his personal capacity, does not own the stock
but the brokerage has a buy call on the stock
Wheels on fire
Aft er a long downturn, profi t growth has improved
PAT (INR b) PAT Growth (%)
Source: Company, MOSL
30
25
20
15
10
5
0
60
48
36
24
12
0
-12
FY09 FY11 FY13 FY15 FY17
FY10 FY12 FY14 FY16 FY18E
Besiders increasing credit costs, there have been
several concerns raised by investors over rising NPAs
as well. However, we believe asset quality has been
stable on an apple-to-apple comparison. Over the
past several quarters, gross non-performing loans
(GNPL) have ranged around 4 %- 4. 5 % on 180 dpd
basis, which is similar to levels seen in FY 16 before
the stipulated NPL migration. However, an impor-
tant thing to note is that the balance sheet is much
stronger today than it was a year ago. The NPL pro-
vision buff er has almost doubled from # 2 , 000 crore
in Q 3 FY 16 (prior to NPL migration) to # 3 , 500 crore
(ex-provisions for the construction equipment fi -
nancing subsidiary). Hence, on Q 3 FY 16 GNPL, the
provision coverage ratio (PCR), a ratio indicating the
funds set aside by banks to cover bad loans, stands
at 140 %. We believe this is one of the most impor-
tant things that have been overlooked by the Street.
Our view on the elevated credit costs seen by
SHTF over the past two years is that it was merely
statutory and not economic. That is, it was only on
account of the RBI requirement of NPL migration
and not because there were any underlying asset
quality issues. We believe write-off s are the only ac-
tual loss to any fi nancing business.
We have analysed write-off s, as a percentage of
AUM, on a two-year lag basis. The reason for this
is that we assume that the time diff erence between
disbursing a loan, the loan becoming an NPL and,
fi nally, writing it off is around two years. This anal-
ysis reveals that write-off s, as a percentage of AUM,
have remained stable and in line with long-term av-
erages over the past four years.
IN THE DRIVER’S SEAT
To sum it up, SHTF’s return ratios are just off cycli-
cal lows with decadal high credit cost and bad loans.
However, credit costs, as percentage of AUM, have
been stable. Cost of credit has been high only in or-
der to maintain the coverage ratio and not because of
high net credit losses.
CY17 RETURN 55%
net profit
ttm p/b (x)2.6
roa 1.65%
#1 ,266cr