Shriram Transport Finance Stock Plunges As Jefferies Says Unit Under Stress

Shares of Shriram Transport Finance Co. Ltd. fell as much as 19.2 percent, the biggest single-day drop since October 2016, after the commercial vehicle financier disclosed an “off-balance sheet” exposure to an unlisted group company.

The company provided a corporate guarantee of Rs 870 crore on non-convertible debentures sold by SVL Ltd. The debt instruments, issued in June 2015, will be due for repayment on June 28, 2019. Shriram Transport Finance's previous years' annual reports didn't include a disclosure about the guarantee, according to a Jefferies report.

Shriram Transport Finance is confident that SVL would be able to repay the loan. The non-bank lender is in touch with the SVL management to ensure that the issue gets resolved, Umesh Revankar, managing director and chief executive officer at Shriram Transport Finance, told BloombergQuint in an interview.

SVL invests in infrastructure, renewable power, real estate, wind turbine manufacturing and cooling and pollution control businesses.

Even in the worst-case scenario of the guarantee being invoked by June next year, Revankar said it wouldn't have any significant impact on Shriram Transport Finance's loan book.

Watch the full interview here:

Stress In SVL

SVL, along with most of the entities that it has invested in, including Shriram EPC, Orient Green Power Company and Haldia Coke, are under financial stress and have defaulted on debt or interest obligations in the past, the Jefferies note said quoting an ICRA report. The company reported a pre-exceptional loss of Rs 143 crore in the financial year through March 2016, according to its annual report for that period—the latest financial report available on its website.

Additionally, Shriram EPC has been referred to the National Company Law Tribunal, and there is a risk of this off-balance sheet exposure becoming a liability for Shriram Transport Finance.

Brokerage View

Morgan Stanley

• If the corporate guarantee does get invoked, a hit of up to 21 percent to earnings per share for the current financial year is likely, apart from an increase of up to 85 basis points in the company's credit cost.
• This could delay the earnings recovery and re-rating at the stock and could weigh on the stock's near term performance.
• Remains ‘Overweight' with target price of Rs 2,000.

Jefferies

• Estimates a potential hit of 4 percent (or Rs 29 per share) to Shriram Transport Finance's book value in case the corporate guarantee is invoked.
• While the cash flows at SVL and its subsidiaries may be inadequate to service the NCDs, other companies within the Shriram group may potentially refinance/aid in repayment.
• Lack of clarity on whether Shriram Transport Finance will have to make additional provisions for this non-funded exposure as per IndAS accounting norms.
• Stays constructive on commercial vehicle outlook.
• Strong loan growth, stable NIM and falling credit costs should drive 42 percent annualised growth in earnings per share and expand returns on assets by 80 basis points in three years through March 2020.
• Adjusting for potential erosion of 4-5 percent, valuations at 2.1 times the book value for the ongoing financial year still appears reasonable.
• Maintained ‘Buy' with target price of Rs 1,890.

Credit Suisse

• Downgraded to ‘Neutral' from ‘Outperform'; cut the target price to Rs 1,400 from Rs 1,910, according to Bloomberg.
• The off-balance sheet exposure is believed to be a risk, according to Bloomberg.