Improved activity post the extended rains is leading to improvement in repayments.

Improved activity post the extended rains is leading to improvement in repayments.

Update on the Indian Equity Market:

On Wednesday, NIFTY closed -0.2% lower. The NIFTY was dragged down by INDUSINDBK (-5.6%), WIPRO (-3.5%) and SBIN (-1.2%). The top performing NIFTY stocks were YESBANK (+3.5%), HEROMOTOCO (+2.5%) and TATAMOTORS (+ 2.0%). The worst performing sectors were NIFTY PVT BANK (-0.9%), NIFTY BANK (-0.8%) and NIFTY IT (-0.1%). Sectors that performed well included NIFTY REALTY (+1.3%), NIFTY AUTO (+1.2%) and NIFTY MEDIA (+0.8%).

Improved activity post the extended rains is leading to improvement in repayments.

Excerpts from an interview with Mr Umesh Revankar, MD – Shriram Transport Finance Co. The interview aired on CNBC-TV18 on 13th January 2020.

  • Shriram Transport (SRTRANSFIN) has raised $ 500 mn through an overseas bond issue. The issue was oversubscribed with a demand of $ 2.2 bn.
  • The issue happened at a coupon of 5.10%. The company’s first US $ bond in April 2019 was at a coupon of 5.92% and the subsequent issue was at a coupon of 5.32%. Over the period, the cost of borrowing is coming down. The all-in, post hedging cost of the current issue is a little less than 10%.
  • The rationale behind borrowing in the offshore market is the diversification of sources of funds. The all-in cost of domestic funds currently is around 9.25% to 9.50%. Offshore cost is 50-60 bps higher as of now.  As STF goes ahead, the cost of borrowing offshore is coming down. The company’s bonds are trading lower than 5% in the market.
  • Mr Revankar believes there will be some revival in demand, especially after the steep drop in MHCV. LCV segment is doing well. Even though there is a YoY drop, last year was the peak for LCVs, against that 15% drop is still good.
  • The inventory levels with manufacturers is coming down. As inventories come down, discounts will come down. In an increasing discount scenario, people tend to wait for further discounts. CVs are earning assets. Customers look at a resale price as it is not personal consumption. When discounts start to come down, there will be more comfort in buying as the value to the asset will be established. Because of these reasons, Mr Revankar expects pre-buying to happen before the BS-VI transition.
  • Shriram Transport is expected to have AUM growth of 8-9% for FY20. Earlier, the management was aiming for double-digit growth. However, 1HFY20 was conservative in terms of lending. The company reduced LTV, controlled lending, focused on only used vehicles, and did not lend much for new vehicles. Mr. Revankar expects that confidence should come back in 2HFY20 and FY20 should see AUM growth.
  • After the extended rainfall, mining and infra activities have finally started. That’s why cement and steel prices are also moving upward. Infra and mining will give some activity for transportation and general business. There is a definite improvement in repayments.
  • On the asset quality front, Shriram Transport disruption in 2QFY20 caused by extended rains. The impact has been arrested in 3QFY20. The asset quality should definitely improve from 4QFY20.
  • Shriram Transport’s lending is to individual operators and their cash flows are not very steady. The company is very patient with customers so there will be some asset quality movement. But the management is not much alarmed by such moves.

Consensus Estimate (Source: market screener and website)

  • The closing price of SRTRANSFIN was ₹ 1,097/- as of 15-January-2020. It traded at 1.4x / 1.2x / 1.0x the consensus Book Value for FY20E / 21E / 22E of ₹ 807/ 933/ 1075 respectively.
  • Consensus target price of ₹ 1,316/- implies a Price to Book multiple of 1.2x on FY22E Book Value of ₹ 1075/-.

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