Shriram Finance Ltd. share price target

Shriram Group & IDFC Group have entered into an agreement to explore merger of their financial services business. Under the stated plan, STFC will become fully owned subsidiary of IDFC and thus will get de-listed from the stock exchange. However, in our view the merger proposal will face multiple headwinds such as: (a) getting regulatory nod due to complex interholding; and (b) the minority shareholders of STFC may not favour the move unless they are offered a very high premium over the CMP. Further, we expect STFC's operating environment would improve after implementation of BS-IV emission norms for vehicles and GST roll-out. The government's efforts to revive growth in infrastructure space and rural economy augur well for...

Operating Income decreased by 0.18% to Rs. 2711.92 Cr in Q4FY17 when compared to the previous quarter. Also it fell by 7.43% when compared with Q4FY16.

SHTF reported a weak Q4FY17 marked by de-growth in disbursement leading to muted AUM growth, significant pressure on margin and sharp deterioration in asset quality (change in DPD).

Operating Performance In-line; Higher Provisioning Drags PAT Shriram Transport Finance Company (STFC) has reported a subdued performance in 4QFY17 with its net profit rising by mere 4% YoY (-56.7% QoQ) to Rs1.5bn. Provisioning for bad debts rose by 6.3% YoY and 44.6% QoQ to Rs6.1bn, as collections continued to remain sluggish in certain pockets along with moving to 120days NPA recognition norms. Disbursements improved by 29.5% QoQ to Rs105.2bn in 4QFY17 as against Rs81.2bn in 3QFY17 primarily due to revival of the demand post demonetization. Its AUM grew by mere 3.3% QoQ and 8.2% YoY to Rs789bn. Assets quality deteriorated as gross NPA ratio increased marginally by 154bps QoQ to 8.2%...

BUY Shriram Transport Finance Company Ltd at CMP Rs. 1086 add on dips to Rs. 1086 - 980 for the target of Rs. 1366

SHTF is well placed for NIM expansion, given (1) A fixed rate book, (2) 2/3rd of the bank borrowings are linked to MCLR and (3) gradual decline in interest rates. However, the shift to 120/90DPD, and focus on relatively newer vehicles (low yielding) will keep NIMs under check. We expect NIMs to decline ~50bps to 7.3% (FY16-19E).

Though management seems optimistic on growth, we expect it to be challenging given the backdrop of rising competition from banks, NBFCs and new players (SFBs).

Although SHTF's operating profits were above estimates, ~32% QoQ rise in provisions dragged PAT down 8% YoY. Growth in AUM moderated to 15% YoY, as disbursements fell 23% YoY (impact of demonetization).

SHTFs 3Q results were a mixed bag. With RBIs dispensation, GNPA (70bps) and provisions (Rs 3.4bn) were lower. However, SHTF has provided an additional Rs 2.1bn to shore up PCR to 75% (500bps QoQ) - one of the best in its class.

XX Gross NPA remained stable as several customers opted for special RBI dispensation during the quarter. Management indicated that had the RBI dispensation not been utilized, the gross NPA ratio would have been higher by 70bps to 7.3% on 150-days overdue basis and further ~100bps higher on 120-days overdue basis. The Company...