Shriram Transport Finance: What should investors do with the stock now?

Shares of Shriram Transport Finance Corporation took a hit on Wednesday on the back of concerns over payments of NCDs by its subsidiary.

As per the annual report released by the firm recently, the company has provided a guarantee of Rs 870 crore for non-convertible debentures (NCDs) issued by SVL, an unlisted entity belonging to the financial conglomerate.

The management of Shriram Transport tried to allay fears of investors, but the Street may not be very convinced. The stock has maintained its downturn.

��The maturity of loans is still a year away and we are quite confident of it being serviced. We also don��t see any need for provisioning as well,�� Umesh Revankar, MD & CEO of Shriram Transport Finance told CNBC-TV18 in an interview. He further added that there are adequate securities against the guarantees given by the firm.

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Here��s a look at what you should do if you hold this stock.

Brokerage: Jefferies | Rating: Buy | Target: Rs 1,890

Research firm Jefferies, in its research note, explained that SVL had issued Rs 650 crore worth zero coupon NCDs in June 2015, which were maturing next year. The outstanding guarantee includes accrued interest, it said, adding that its previous annual reports do not include disclosures around the guarantee.

��Cash flows at SVL, subsidiaries may be inadequate to service the NCD, but other companies within Shriram group may potentially refinance/aid in repayment. However, if SVL defaults on the NCDs and the guarantee is invoked, potential hit to Shriram Transport��s BV could be around 4 percent post tax (Rs 29/ share),�� analysts at the firm wrote in their report. It

also sees the need to raise additional capital as provisioning could rise for the NBFC.

There is lack of clarity as to whether ShriramTransport has to make additional provisions for this non funded exposure as per IndAS. Potential 100�percent provisioning may hit tier I capital (14.2�percent Q4 FY18) by 50 bps, thus accelerating need for capital raise.

Brokerage: Morgan Stanley | Rating: Overweight | Target: Rs 2,000

The global research firm is awaiting more clarity on the issue, but believes that the exposure financial aspects.

"Shriram EPC is a subsidiary of SVL Ltd. Shriram EPC has been referred to NCLT and hence there is a meaningful risk of this off balance sheet exposure becoming a liability for STFC. This computes to 3.8�percent and 3.2�percent of our FY19e and FY20e BVPS. It could hurt our FY19 EPS by up to 21�percent and increase FY19 credit costs by up to 85 bps.," the report

released by Morgan Stanley stated.

Hence, it expects a delay in earnings recovery and re-rating of the stock too. It could weigh on the stock performance as well. "We note that STFC has made significant provisions in recent years (NPL coverage of 70�percent on 90dpd NPLs and 175 percent on 180dpd NPLs). We await more clarity from the company on the exposure and potential coping measures.

Analyst: Manish Sonthalia of Motilal Oswal

The expert believes that the event with respect to Shriram Transport could be a one-off event. He is not too worried about credit issues with names such as Shriram Transport. First Published on Jul 4, 2018 02:00 pm