Emkay also turned overweight on the stock in its NBFC Emkay Alpha Portfolio.
Shriram Transport Finance Corporation (SHTF) continued its good run for a second consecutive session, rising nearly 9 percent intraday on February 5, as brokerages remained bullish with the company showing improved growth and asset quality in the third quarter.
The rally followe 6 percent upside in the previous session. The share was quoting at Rs 1,124.20, up Rs 76.80, or 7.33 percent, amid high volumes on the BSE at 1410 hours.
Emkay global upgraded the stock to “buy” from “hold”, the first for an NBFC since IL&FS crisis, on improving growth and asset quality along with easing liquidity scenario and attractive valuations.
The brokerage says SHTF is better positioned to regain lost momentum and profitability with improving margins and declining credit costs.
Emkay said it remained confident of SHTF's business model (lender of last resort) and recovery abilities.
"We are increasing our FY21E/FY22 EPS by around 11/7 percent respectively and increase price target to Rs 1,459 (Rs 1,221 earlier) corresponding to 1.3x P/Book FY22E with around 2.9 percent return on assets (RoAs) and around 16.6 percent return on equities (RoEs),” it said.
The brokerage also turned overweight on the stock in its NBFC Emkay Alpha Portfolio.
In the December quarter, the company's assets under management (AUM) grew by around 6.7 percent YoY (up 0.8 percent QoQ) to Rs 1,08,931 crore, mainly dominated by used vehicles financing. Disbursement growth of 19.4 percent YoY, however, was aided by low-base effect of last year.
The surprise of the quarter was the decline in headline non-performing assets (NPA) numbers along with sharp reduction in credit costs, which was led by decent write backs. Gross NPA dropped 9bps QoQ to 8.71 percent and net NPA slipped 6bps QoQ to 6.09 percent in Q3.
With overall improvement in demand for used vehicles, Emkay expects trend in NPAs to reverse and recoveries to aid profitability for the company.
Profit during the quarter grew by 38.4 percent YoY to Rs 879.2 crore, which was better than CNBC-TV18 poll estimate of Rs 701.2 crore.
Net interest income increased 1.4 percent YoY to Rs 2,055.4 crore in the quarter.
Net interest margin of 7.14 percent was at 11-quarter low in Q3FY20, down 7.19 percent QoQ and 7.44 percent YoY. "Margin is expected to improve with ease in availability of funds,” Emkay said.
While maintaining a “buy” call, with a price target of Rs 1,524, HDFC Securities said its stance on SHTF remained unchanged as operational performance was in line with expectations.
"News on the asset quality front is positive, but we watch for sustainability, considering the broader economic environment. An improvement in demand and better availability of funds could improve SHTF's growth prospects. The possibility of a 3-way merger within the group remains an overhang," it added.
PhillipCapital also said SHTF delivered stable performance. However, the brokerage expects AUM growth to remain moderate at 13/12 percent in FY21/22, as the demand for commercial vehicles (CVs) remains weak amid weak economic activity.
Nevertheless, all the negatives are priced in, as the stock trades at its historical low valuations of 0.9x FY22 BV with a RoA of 2.9 percent and RoE of 17 percent, said the brokerage which maintained a “buy” rating with a target of Rs 1,325.
Morgan Stanley also maintained “overweight” rating with a price target of Rs 1,365. "Credit costs were much lower than estimates due to sharply lower NPA formation. RoE hit 20 percent in the third quarter and decadal low valuation is attractive," it said.
Global brokerage UBS, which has a target price of Rs 1,650, said it maintained “buy” rating and feels the decline in wholesale rates is expected to aid margins and asset quality to remain stable.
Among others, Prabhudas Lilladher and Motilal Oswal also have a “buy” call, with a price target of Rs 1,444 and Rs 1,385, respectively.
"We upgrade our estimates by 8-9 percent to factor in lower credit costs. Valuations at 1x PBV factors in asset quality and growth related headwinds," said Motilal Oswal.
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