Shriram Transport Finance (STFC)'s non performing assets increases

Sharp rise in the non-performing assets (NPA) of its equipment finance subsidiary impacted Shriram Transport Finance (STFC)'s consolidated numbers for the March 2015 quarter. Notably, the gross NPA of its equipment finance business (5% of overall assets under management) jumped from 2.9% in December 2014 quarter to 15.7% in the March 2015 quarter. This was fuelled by classification of loans worth Rs 400 crore as NPA in the quarter. Consequently, the consolidated net profit fell 73.3% year-on-year to Rs 84 crore. 

The bad news does not end here. STFC management could declare loans worth another Rs 400 crore as NPAs in the coming quarters, which could again lead to a surge in the gross NPA ratio of the equipment finance subsidiary to about 30%. 

STFC also plans to infuse Rs 100 crore to shore up the networth as well as tier I ratio of its equipment finance subsidiary. Some analysts though believe STFC may need to add more capital in this subsidiary.

"We believe STFC will have to infuse more capital into the subsidiary to maintain a tier 1 above 10-11% till recovery gathers pace", say analysts at Religare Capital Markets. They have trimmed the equipment finance subsidiary's value from Rs 88 per share earlier to Rs 10 per share of STFC.

The subsidiary's NPAs have increased due to delayed payments by the government over the last 1-1.5 years. Delay in pick up in infrastructure activity have impacted payments from contractors, which in turn continues to put pressure on the asset quality. For example, mining and NHAI projects are stalled in South India. Management indicated that this business' asset quality will improve only after the September 2015 quarter.

Post the dismal show, most analysts have trimmed their FY16 earnings estimates by 10-12% for STFC. The STFC scrip has under-performed S&P BSE Sensex in recent times. Even as analysts remain bullish on STFC from a long-term as it is a direct play on recovery in commercial vehicles, they expect the stock to be under pressure in the near-term due to the weakness in its equipment finance subsidiary. 

Positively, STFC stands to gain from lower interest rates as banks form 67% of its total borrowings. An earlier than expected pick up in mining activities should add momentum to STFC's topline, which is benefitting from better demand from truck operators. 

For the March quarter, STFC's standalone net profit of Rs 317 crore (up 7.4% year-on-year) was 6.7% lower than Bloomberg consensus of Rs 339 crore. But, bottomline was led by a strong 49% year-on-year growth in net interest income to Rs 948 crore besides healthy AUM growth (up 10% year-on-year) and control over slippages. Management expects AUM growth to be between 10-12% in FY16 and it could touch 15% in case of a good monsoon. The growth in AUMs came from used CVs (92% of overall AUM, up 15.4% year-on-year) in the quarter; new CV AUMs fell 25.1% year-on-year and remained weak. Net interest margin (NIM) improved 10 basis points sequentially and 20 basis points year-on-year to 6.7% due to easing cost of funds. Management expects to maintain margin at these levels going forward.