(SHTF IN) Rating: BUY CMP: Rs1,411 TP: Rs1,787 July 25, 2018 Q1FY19 Result Update Change in Estimates Target Reco Change in Estimates Current Previous FY19E FY20E FY19E FY20E Rating BUY BUY Target Price 1,787 1,822 NII (Rs.) 71,232 87,978 68,558 84,064 % Chng. 3.9 4.7 PPoP (Rs.) 65,196 80,405 64,370 78,312 % Chng. 1.3 2.7 EPS (Rs.) 110.3 144.8 102.5 132.0 % Chng. 7.6 9.7 Key Financials FY17 FY18 FY19E FY20E Net Int. Inc. 55,613 66,883 82,175 100,836 Growth (%) 5.6 25.4 23.2 23.5 Op. Profit 43,682 54,392 65,196 80,405 PAT 12,573 15,790 25,032 32,849 EPS (Rs.) 55.4 69.6 110.3 144.8 Gr. (%) 6.7 25.6 58.5 31.2 DPS (Rs.) 10.0 11.0 13.0 15.5 Yield (%) 0.7 0.8 0.9 1.1 Margin (%) 6.1 6.6 6.8 7.0 RoAE (%) 11.7 13.2 17.8 19.1 RoAA (%) 1.8 1.9 2.6 2.9 PE (x) 25.5 20.3 12.8 9.7 P/BV (x) 2.8 2.5 2.1 1.7 P/ABV (x) 3.3 3.1 2.5 2.1 Key Data SRTR.BO SHTF IN 52-W High / Low Rs.1,671 / Rs.898 Sensex / Nifty 36,985 / 11,167 Market Cap Rs.320bn/ $ 4,661m Shares Outstanding 227m 3M Avg. Daily Value Rs.3762.25m Shareholding Pattern (%) Promoter s 26.08 Foreign 49.48 Domestic Institution 4.01 Public & Others 20.43 Promoter Pledge (Rs bn) Stock Performance (%) 1M 6M 12M Absolute (1.7) (2.4) 43.7 Relative (5.7) (4.9) 25.8 Pritesh Bumb priteshbumb@plindia.com 91-22-66322232 R Sreesankar rsreesankar@plindia.com 91-22-66322214 Shweta Daptardar shwetadaptardar@plindia.com 91-22-66322245 Business momentum strong; stable asset quality Quick Pointers Positive net worth impact under IND AS mainly on lower provision requirement Cautious on near term MHCV demand outlook SHTF reported healthy net profit of Rs5.7bn (PLe: Rs5.3bn on igaap) on the back of lower provisioning on transition to IND AS and benefits accruing from securitization. Historically SHTF maintained higher provision coverage on assets and hence lower Stage 3 provisions under ECL model of IND-AS, translated into lower credit costs of ~200bps for Q1FY19. Key positives were: (i) strong AUM growth of 22% YoY on doubling of new CV disbursements YoY, (ii) stable NIMs and (iii) positive impact on net worth under IND AS. Management expects 20% AUM growth in FY19 with cautiousness on M&HCV demand from Axle Load norms & incremental hardening macro, but NIMs will be steady with overall credit cost coming down. We marginally trim our growth estimate, increase opex and tinker slightly on credit cost increasing our earnings estimates, but we increase our CoE assumptions and hence revise our TP to Rs1,787 (from Rs1,832) based on 2.6x Mar-20 ABV; retain our BUY stance. NII strong as NIMs stabilize: NII grew 20% YoY led by write-backs on interest reversals (on Stage 3 NPLs), and robust 48% YoY growth in new CVs. NIMs at 7.44% were largely maintained YoY on the back of better yields and steadystate cost of funds at 9.0% as major part of incremental borrowing emerged from securitization. Opex was slightly higher than expectations on increased branches and employee strength. We expect NIMs pressure to be minimal on better mix in both borrowing s and assets. Business growth at 18-20% ahead: AUM saw strong growth of 22% (IND- AS) v/s guidance of 18% mainly on strong growth in new CVs of 48% YoY and decent growth in used CVs of 17% YoY which was led by rural expansion and higher securitization growth of 31%, off-book AUMs stood robust. SHTF expects loan growth at 20% in FY19 anticipating slower MHCV demand outlook. Going forward, growth to continue from LCVs, used vehicles and tractors on the back of GST led improvement in infra activity and good outlook on monsoon. We expect 20% AUM growth for FY19, with current Tier I CAR at 14% largely supportive of the same. Moved to IND AS, positive 10% impact on net worth: GNPA/NNPA decreased by 17bps/9bps QoQ to 8.98%/2.74% on GAAP basis, but post including securitized impairment Gross Stage-3 assets were at 9.1% of AUM which moved down 180bps YoY on comparable basis. Higher provisioning in the past and decline in ECL provisioning (37 bps QoQ) brought down overall coverage ratio to 36% under the new methodology with subsequent fall in credit costs to 2.16% (370 bps down QoQ). Lower ECL requirement led to positive networth impact of 9-10% according to management. July 25, 2018 1
NII growth was in-line with expectations on good growth in AUM Opex continued to be on higher side as SHTF continues to add presence and manpower Provisions came down on back of adopting IND-AS accounting in which ECL requirement is lower than PCR carried Strong AUM growth continued from new CVs, while with small share business loans grew strong as well Exhibit 1: Operational performance benefits from IND-AS & growth IND-AS IND-AS I-GAAP Rs in million Q1FY19 Q1FY18 YoY gr. Q4FY18 QoQ gr. Interest income 37,291 31,081 20.0 29,502 26.4 Interest expenses 18,888 15,692 20.4 14,633 29.1 Net Interest Income 18,403 15,390 19.6 14,869 23.8 Total Net Interest Income 18,403 15,390 19.6 18,076 1.8 Operating & Other Income 106 102 4.1 1,717 (93.8) Net revenue 18,509 15,491 19.5 19,792 (6.5) Operating expenses 4,367 3,347 30.5 4,193 4.1 Operating profit 14,142 12,144 16.5 15,599 (9.3) Provision for bad debts 5,330 5,107 4.4 13,666 (61.0) Profit before tax 8,812 7,037 25.2 1,934 355.7 Tax 3,095 2,440 26.8 488 534.6 Profit after tax 5,717 4,597 24.4 1,446 295.4 Business mix Total AUM 1,009,781 825,974 22.3 953,063 6.0 on book 828,930 687,951 20.5 796,729 15.7 off book 180,851 138,023 31.0 156,334 4.0 on book % 82% 83% (1.2) 84% (1.8) Used CV book 839,192 719,570 16.6 800,976 4.8 New CV book 121,404 81,860 48.3 108,834 11.5 Used CV book share 83% 87% (4.0) 84% (0.9) Disbursement 134,250 108,180 24.1 151,220 (11.2) Used CVs 109,550 98,570 11.1 112,780 (2.9) New CVs 19,360 9,610 101.5 31,540 (38.6) Asset quality as per I-GAAP was largely steady with PCR continued at 71%. (IND-AS explained lower) Asset quality I-GAAP I-GAAP I-GAAP Gross NPA (mn) 74,585 55,490 34.4 73,764 1.1 Net NPA (mn) 21,319 16,197 31.6 21,311 0.0 Gross NPA (%) 9.0% 8.0% 1.0 9.2% (0.2) Net NPA (%) 2.7% 2.5% 0.3 2.8% (0.1) Coverage ratio (%) 71.4% 70.8% 0.6 71.1% 0.3 Credit Cost (%) 2.2% 2.5% (0.4) 5.9% (3.7) Margins saw slight decline on tightening funding cost Ratios Gross Spread (on book) 9.7% 11.0% (132) 9.6% 6 NIM/AUM 7.5% 7.6% (17) 7.8% (30) NIM/AUM - Reported 7.4% 7.4% 3 7.5% (8) CRAR 17.1% 15.5% 158 16.9% 19 Note QoQ numbers except asset quality are not comparable July 25, 2018 2
Exhibit 2: Growth has been strong as per IND-AS accounting Busines mix Q1FY19 Q1FY18 IND-AS IND-AS IND-AS % chg YoY Q4FY18 % chg QoQ Total AUM 1,009,781 825,974 22.3 964,624 4.7 on book 828,930 687,951 20.5 802,029 3.4 off book 180,851 138,023 31.0 162,595 11.2 on book % 82% 83% (1.2) 83% (1.1) Used CV book 839,192 719,570 16.6 810,133 3.6 New CV book 121,404 81,860 48.3 110,428 9.9 Used CV book share 83% 87% (4.0) 84% (0.9) New CV book share 12% 10% 2.1 11% 0.6 Exhibit 3: Asset Quality improved under IND-AS with lower ECL Asset quality under IND-AS Q1FY19 Q1FY18 chg YoY Gross Stage 3 91,573 89,723 2.1 Gross Stage 3 (% of AUM) 9.1% 10.9% (179) Net Stage 3 58,390 55,830 4.6 Net Stage 3 (% of AUM) 5.8% 6.8% (98) ECL Provision on Gross Stage 3 33,183 33,892 (2.1) Coverage Ratio Stage 3 36.2% 37.8% (154) Gross Stage 1 & 2 918,751 734,828 25.0 Net Stage 1 & 2 895,347 713,353 25.5 ECL Provision on Gross Stage 1 & 2 23,404 21,475 9.0 ECL Provision (%) Stage 1 & 2 2.5% 2.9% (38) Exhibit 4: AUM growth was much stronger Exhibit 5: contributed from New CVs 40% 35% 30% 25% 20% 15% 10% 5% 0% AUM growth On book AUM gr. 80% 60% 40% 20% 0% -20% -40% Used CVs AUM gr. New CVs AUM gr. July 25, 2018 3
Exhibit 6: New CV disbursement was strong Exhibit 7: used CVs was also decent New CVs disbursement gr. Disbursement growth Used CVs disbursement gr. 310% 270% 230% 190% 150% 110% 70% 30% -10% -50% -90% 80% 60% 40% 20% 0% -20% Exhibit 8: New CVs continue to gain in mix, biz/w.cap loans grow well Used CVs AUM New CVs AUM Others AUM 15%13% 12%10% 9% 8% 8% 8% 8% 8% 10%11% 10%10%10%10%10%11% 11%12% 2Q14 84.0% 84.7% 87.7% 88.5% 89.4% 90.4% 90.9% 92.2% 92.1% 91.6% 89.5% 89.2% 87.0% 87.4% 87.1% 87.1% 86.6% 85.6% 84.0% 83.1% Exhibit 9: Stable mix amongst segments but improves M&LCVs HCVs PV Tractors Others Equipment 3% 2% 2% 6% 6% 5% 2% 5% 2% 3% 2% 3% 2% 3% 2% 3% 1% 1% 1% 3% 3% 3% 1% 1% 0% 5% 6% 4% 5% 5% 4% 4% 4% 5% 5% 4% 4% 4% 22% 23% 22% 23% 23% 24% 25% 25% 25% 25% 24% 24% 23% 23% 42% 44% 49% 48% 46% 45% 46% 46% 47% 47% 47% 47% 47% 47% 27% 26% 22% 21% 20% 20% 20% 20% 20% 20% 21% 21% 21% 21% July 25, 2018 4
Exhibit 10: Margins saw slight dip as cost of funds rose 8.5% 8.3% 8.1% 7.9% 7.7% 7.5% 7.3% 7.1% 6.9% 6.7% 6.5% NIM (%) 1Q14 2Q14 Note Margins not comparable Exhibit 11: Opex saw continued to be higher as company continue to add presence and manpower 50% 40% 30% 20% 10% 0% -10% -20% -30% 2Q14 Opex growth YoY Exhibit 12: Asset quality deteriorated on moving to 90dpd 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Gross NPA (%) Net NPA (%) Exhibit 13: SHTF maintained its PCR at 70% hence kept credit cost high 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Credit cost (%) July 25, 2018 5
Exhibit 14: Change in estimates table We improve our growth outlook with slight margin tailwinds but retain our credit cost estimates (Rs mn) Old Revised % Change FY19E FY20E FY19E FY20E FY19E FY20E Net interest income 80,752 98,024 82,175 100,836 1.8 2.9 Operating profit 64,370 78,312 65,196 80,405 1.3 2.7 Net profit 23,262 29,945 25,032 32,849 7.6 9.7 EPS (Rs) 102.5 132.0 110.3 144.8 7.6 9.7 ABVPS (Rs) 558.6 687.9 560.9 679.6 0.4 (1.2) Price target (Rs) 1832 1787 (2.5) Recommendation BUY BUY Exhibit 15: ROE Decomposition (on Assets) ROA Decomposition (on Assets) FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Interest income 15.87 15.80 15.14 15.81 15.10 15.23 15.35 15.59 Interest expenses 7.12 8.36 8.09 7.95 7.29 7.01 6.82 6.73 Net interest income 8.75 7.43 7.05 7.86 7.81 8.21 8.52 8.86 Income from securitization 4.65 2.84 1.42 1.00 1.34 1.11 1.14 1.13 Other Inc. from operations 0.42 0.98 0.79 0.29 0.11 0.29 0.13 0.13 Total income 9.16 8.41 7.84 8.15 7.93 8.50 8.66 8.99 Employee expenses 0.95 0.87 0.79 0.93 0.77 0.88 0.96 1.02 Other operating expenses 1.10 1.21 1.28 1.19 1.02 0.95 0.93 0.90 Operating profit 7.11 6.33 5.77 6.03 6.14 6.68 6.76 7.07 Tax 1.63 1.20 1.11 0.95 0.94 0.99 1.40 1.55 Loan loss provisions 2.11 2.44 2.38 3.23 3.43 3.75 2.77 2.63 Net profit 3.38 2.69 2.28 1.85 1.77 1.94 2.60 2.89 Exhibit 16: Valuation Table - We revise our TP to Rs1,787 (from Rs1,832) as we slightly tweak higher our CoE assumptions Fair price - EVA 1,791 Fair price - P/ABV 1,781 Average of the two 1,787 Target P/ABV 2.6 Target P/E 12.3 Current price, Rs 1410 Upside (%) 27% Dividend yield (%) 1% Total return (%) 28% July 25, 2018 6
Exhibit 17: SHTF One year forward Valuations move above average levels 3.5 P/ABV 3 yr avg. avg. + 1 SD avg. - 1 SD 3.0 2.5 2.0 1.5 1.0 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 July 25, 2018 7
Income Statement (Rs. m) Int. Inc. / Opt. Inc. 107,488 123,996 147,963 177,395 Interest Expenses 51,874 57,113 65,788 76,559 Net interest income 55,613 66,883 82,175 100,836 Growth(%) 10.1 20.3 22.9 22.7 Non-interest income 819 2,363 1,300 1,429 Growth(%) (55.5) 188.6 (45.0) 10.0 Net operating income 56,432 69,246 83,475 102,266 Expenditures Employees 5,482 7,149 9,294 11,617 Other Expenses 6,928 7,114 8,395 9,654 Depreciation 339 590 590 590 Operating Expenses 12,410 14,263 17,689 21,271 PPP 43,682 54,392 65,196 80,405 Growth(%) 12.3 24.5 19.9 23.3 Provisions 24,443 30,506 26,685 29,868 Profit Before Tax 19,239 23,887 38,511 50,537 Tax 6,666 8,096 13,479 17,688 Effective Tax rate(%) 34.6 33.9 35.0 35.0 PAT 12,573 15,790 25,032 32,849 Growth(%) 6.7 25.6 58.5 31.2 Balance Sheet (Rs. m) Source of funds Equity 2,269 2,269 2,269 2,269 Reserves and Surplus 110,753 123,454 153,487 186,335 Networth 113,022 125,723 155,756 188,604 Growth (%) 11.3 11.2 23.9 21.1 Loan funds 531,092 653,665 768,819 909,447 Growth (%) 6.7 23.1 17.6 18.3 Deferred Tax Liability - - - - Other Current Liabilities 99,989 105,315 118,639 134,000 Other Liabilities - - - - Total Liabilities 744,104 884,704 1,043,214 1,232,051 Application of funds Net fixed assets 838 1,200 1,262 1,324 Advances 678,402 827,400 987,962 1,182,653 Growth (%) 6.4 22.0 19.4 19.7 Investments 15,493 14,795 15,535 16,312 Current Assets 44,996 36,992 33,491 25,957 Net current assets (54,993) (68,323) (85,147) (108,042) Other Assets 4,374 4,317 4,963 5,804 Total Assets 744,103 884,704 1,043,214 1,232,051 Growth (%) 9.5 18.9 17.9 18.1 Business Mix AUM 787,609 953,063 1,144,101 1,366,116 Growth (%) 8.2 21.0 20.0 19.4 On Balance Sheet 654,629 796,729 960,408 1,150,278 % of AUM 83.12 83.60 83.94 84.20 Off Balance Sheet 132,981 156,334 183,692 215,838 % of AUM 16.88 16.40 16.06 15.80 Profitability & Capital (%) NIM 6.1 6.6 6.8 7.0 ROAA 1.8 1.9 2.6 2.9 ROAE 11.7 13.2 17.8 19.1 Source: Company Data, PL Research Quarterly Financials (Rs. m) Y/e Mar Q2FY18 Q3FY18 Q4FY18 Q1FY19 Int. Inc. / Operating Inc. 26,761 27,573 29,502 37,291 Income from securitization 2,645 3,061 3,206 - Interest Expenses 13,082 13,540 14,633 18,888 Net Interest Income 16,324 17,094 18,076 18,403 Growth (%) 20.6 21.1 28.3 19.6 Non-Interest Income 324 221 1,717 106 Net Operating Income 16,647 17,315 19,792 18,509 Growth (%) 21.5 21.1 38.1 19.5 Operating expenditure 3,485 3,828 4,193 4,367 PPP 13,162 13,486 15,599 14,142 Growth (%) - - - - Provision 5,879 5,854 13,666 5,330 Exchange Gain / (Loss) - - - - Profit before tax 7,283 7,633 1,934 8,812 Tax 2,492 2,676 488 3,095 Prov. for deferred tax liability 5,137 6,783 4,319 - Effective Tax Rate 34.2 35.1 25.2 35.1 PAT 4,791 4,956 1,446 5,717 Growth 24 43 (3) 24 AUM 854,626 900,186 964,624 1,009,78 1 YoY growth (%) 13.5 18.0 22.5 22.3 Borrowing 584,556 622,141 681,687 - YoY growth (%) 7.8 15.8 22.2 (100.0) Key Ratios CMP (Rs) 1,411 1,411 1,411 1,411 EPS (Rs) 55.4 69.6 110.3 144.8 Book value (Rs) 498 554 686 831 Adj. BV(Rs) 425 460 561 680 P/E(x) 25 20 13 10 P/BV(x) 3 3 2 2 P/ABV(x) 3 3 3 2 DPS (Rs) 10 11 13 16 Dividend Payout Ratio(%) 18.0 15.8 11.8 10.7 Dividend Yield(%) 0.7 0.8 0.9 1.1 Asset Quality Gross NPAs(Rs m) 54,084 73,764 79,288 85,557 Net NPA(Rs m) 16,590 21,311 28,483 34,386 Gross NPAs to Gross Adv.(%) - - - - Net NPAs to net Adv.(%) 2.7 2.8 3.1 3.2 NPA coverage(%) 69.3 71.1 64.1 59.8 Du-Pont NII 7.8 8.2 8.5 8.9 NII INCI. Securitization 9.2 9.3 9.7 10.0 Total income 9.3 9.6 9.8 10.1 Operating Expenses 1.8 1.8 1.9 1.9 PPOP 7.5 7.8 7.9 8.2 Total Provisions 3.4 3.7 2.8 2.6 RoAA 1.8 1.9 2.6 2.9 Avg. Assets/Avg. net worth - - - - RoAE 11.7 13.2 17.8 19.1 Source: Company Data, PL Research July 25, 2018 8
Price Chart Recommendation History (Rs) 1650 1423 1196 968 741 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 No. Date Rating TP (Rs.) Share Price (Rs.) 1 31-Jul-17 Accumulate 1153 1018 2 9-Oct-17 Accumulate 1153 1052 3 1-Nov-17 BUY 1402 1197 4 10-Jan-18 BUY 1402 1515 5 13-Apr-18 BUY 1705 1559 6 27-Apr-18 BUY 1822 1628 7 10-Jul-18 BUY 1822 1132 PL s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly July 25, 2018 9
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Marg, Worli, Mumbai-400 018, India Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209 www.plindia.com Bloomberg Research Page: PRLD <GO> July 25, 2018 10