3QFY18 RESULTS REVIEW
In line with the pick-up in CV cycle, business momentum was strong and AUM growth at 18% YoY was higher than the upper end of the management guidance. Earnings growth of 43% YoY was driven by a combination of double-digit AUM growth, stable margin, and declining credit cost. Key highlights of the performance are:
- Asset growth was strongest in past seven quarters at 5% QoQ and 18% YoY. Used vehicles continued to dominate the loan book with 89% contribution.
- Calculated margin improved 34bps YoY, aided by declining borrowing costs. As such, NII grew 21% YoY, a little faster than the balance sheet growth.
- Asset quality remained stable with GNPAs at 8.0% vs. 8.1 in Sep17 (120 dpd). Credit cost at 65bps was the lowest since demonetization, aiding 43% YoY growth in earnings.
Management commentary: Management is seeing good traction from rural markets and construction-related areas. AUM growth rates should continue at 15%+ for few more quarters. GNPAs should rise 120 bps next quarter as they migrate to 90 dpd. Overall, they see credit cost coming down from 300bps level to 250bps level.
Our long-term view – strong earnings cycle ahead
Growth: Revival in rural economy, expected boom in construction activity and fading impact of demonetization & GST should ensure strong asset growth ahead. Relationship with trucking community, quick turnaround time, deep geographic presence, and repayment convenience are competitive advantages that will ensure AUM CAGR of 14% over FY18-20e.
Margins: A large part of the yield adjustment is over (discontinuing 10yr+ trucks and focusing on newer vehicles). Also, a large proportion of Shriram’s borrowing is long term in nature and hence the re-pricing will continue over FY18-19E. As such, margins will remain stable at current levels over FY18-20E.
Asset quality: Multiple events had pressurized asset quality over FY15-17. Improving cashflows from farm & trucking operations coupled with stable re-sale prices for CVs will ensure lower credit costs over FY18-20E. We pencil in 310bps, 250bps and 220bps over FY18, FY19 and FY20 respectively.
Valuation: A combination of double-digit growth, stable margins and improving asset quality will ensure 32% earnings CAGR over FY18-20E and RoEs will revert to 18% levels. Current valuation at 1.9x FY20E is the lowest among peers. We value it at 2.4x FY20E book or INR1,829 per share, given the prospect of a cyclical revival. Maintain BUY.