Shriram Transport Gains After Terminating Loan Guarantee To Subsidiary 

Shares of Shriram Transport Finance Co. Ltd. rose nearly 4 percent after the company said it ended the corporate guarantee on non-convertible debentures to a group subsidiary.

The non-banking lender, in a filing with the bourses, said the corporate guarantee towards bonds worth Rs 650 crore issued by group company SVL Ltd. in June 2015 has been terminated with immediate effect. This means the contingent liability of Shriram Transport Finance with respect to redemption or maturity of the bonds stands terminated.

This comes at a time Indian non-bank financiers have been hit by tighter financing conditions, leading to higher funding costs for the firms. This has also led to selloff in the shares of non-bank financial companies.

“If liquidity concerns were to persist, loan growth for the ongoing financial year could moderate to 15-18 percent compared to the 18-20 percent guidance provided at the start of the year,” Umesh Revankar, managing director and chief executive officer of Shriram Transport Finance, told BloombergQuint in an interaction.

The bonds for which Shriram Transport issued a guarantee have a face value of Rs 650 crore and the outstanding as of March 2018 was Rs 870 crore. It was due in June 2019. Based on the corporate guarantee issued, in case of any default by SVL, Shriram Transport would have to repay investors. The stock has seen de-rating on corporate governance and provisioning concerns after the company made a separate disclosure for SVL-linked guarantees in its FY18 annual report.

Rating agencies had downgraded banking facilities of SVL to “default”. SVL last month was admitted into the bankruptcy process by the Chennai bench of the National Company Law Tribunal based on a petition filed by a customer owing to an internal dispute. Shriram Transport, however, had clarified that it would not impact the company.

Analysts consider the termination of corporate guarantee a positive for Shriram Transport. Given the weak financials of SVL and its referral to NCLT, any contingent liability was a key concern for Shriram Transport, they said.

Yet, growth concerns remain.

The company expects its growth in the October-December quarter to be impacted if the current tighter liquidity conditions persist.

The company may consider raising capital next year or this year-end if the demand situation remains healthy, Revankar said. “For now, vehicle demand remains good and asset quality performance in the second quarter is as per expectations.”

While Revankar said that banks and mutual funds were shying away from lending, he is confident of protecting margins and passing on any higher cost of funds. Revankar sees the incremental cost of borrowing about 100 basis points higher.

No Progress on Merger

Revankar said no discussions have been held on the possibility of a merger with group company Shriram City Union Finance. Preliminary discussions on possible synergies of a merger have been going on for a while, he said.

Here’s what analysts have to say about Shriram Transport

UBS

• Retains ‘Buy’ with a target price of Rs 1,550, a potential upside of 43.7 percent.
• Considers Shriram Transports as a preferred pick among NBFCs.
• Recent liquidity crisis to hurt growth in third quarter but long-term impact limited.
• Expects loan growth and credit costs to surprise positively, supported by healthy profitability for the transport operators and a shift in market share from unorganised to organised sector.
• The stock is trading at 20 percent discount to its five-year average price-to-book value multiple.

Credit Suisse

• Retains ‘Neutral’ with a target price of Rs 1,250, a potential upside of 16 percent.
• Remain watchful of corporate actions at the group level (including merger with parent Shriram Capital)
• Tighter liquidity environment could hit loan growth rates.

Nomura

• Retains ‘Buy’ and hikes target price to Rs 1,675, a potential upside of 55.4 percent, on removal of 15 percent discount on valuation multiple offered due to guarantees given to SVL. (Previous target price was Rs 1,425)
• The commercial vehicle business is seeing a turnaround in asset quality.

Watch the interview below