Accumulate Shriram Transport Finance; target of Rs 1532: Prabhudas Lilladher

Prabhudas Lilladher recommended accumulate rating on Shriram Transport Finance with a target price of Rs 1532 in its research report dated December 14, 2021.

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Prabhudas Lilladher’s research report on Shriram Transport Finance

The merger of Shriram Capital (SCL) and Shriram City Union Finance (SCUF) into Shriram Transport Finance (SHTF) throws a mixed picture characterized by (a) tad expensive deal for SHTF (swap ratio SHTF:SCUF=1.55:1 v/s expectation of 3:1) (b) inclination largely towards providing exit to PE players (Piramal & TPG: post-merger holdings: 8.4%/2.7% resp) (c) key management changes (Mr Revankar to be VC and Mr Chakravarti MD of merged entity) (d) negligible commonality on product portfolios entailing higher costs & time and (e) challenges w.r.t business synergies, employee, culture and maintaining investor confidence. However, on positive side this merger (a) removes long standing overhang on SHTF stock, alongside streamlining the whole structure (b) gives birth to one of the largest retail NBFCs (with combined: AUM:Rs1520bn, branches: 2796, employees:~50,000, customer base: 6.4mn, CAR: 24%, NPA:7%) (c) provides diversified loan mix with 74% of CV loan share and remainder for MSME, 2W, gold, HF, PL (d) reduces cost of funds (30-50bps) and potential rating upgrade and (e) leverages tech, cross sell & process improvements.

Outlook

We expect the combined entity to report 20%+/11% YoY PAT growth, 13-14% RoE and 2.4-2.5% RoAs with SHTF witnessing ~300bps yields expansion translating into 27/25bps RoA accretion over FY23-24E. While the merger should help SHTF combat business cyclicality to an extent, SCUF benefits too w.r.t funding costs improvement as the Co. now will be eligible for ratings upgrade plus its valuations stand higher. While we closely monitor this merger sail through, the current valuations provide comfort (1.2x PABV Sep-23E) and we reiterate our ‘Accumulate’ stance on SHTF maintaining price target of Rs1,532.

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