Global rating agency Standard and Poor’s (S&P) has affirmed its ‘BB-‘ long-term and ‘B’ short-term issuer credit ratings with stable outlook on private lender Shriram Transport Finance Company (STFC) due to improvement in its resource mobilisation and collections.
S&P also removed the ratings from CreditWatch. The ratings placed under watch with negative implications on June 26, 2020.
The rating affirmation has come at a time when the Indian commercial vehicle market is showing signs of recovery, with positive growth in sales reported in November. The industry expects a gradual recovery in the coming months.
“STFC is likely to sustain the recent improvement in its resource mobilisation, collections, and on-balance-sheet liquidity over the next 12 months. The stable outlook on STFC reflects the view that the company’s deterioration in asset quality will be manageable over the next 12 months, S&P Global Ratings said in a statement.
Strong Q2 numbers
The company’s results for the second quarter of fiscal 2021 (Q2FY21) were better than expected, with a material recovery in semi-urban and rural markets. The reopening of the Indian economy following Covid-19 has increased cash flows of road transport operators (the company’s key borrowers).
Collections have improved significantly and were more than 90 per cent (by value) in September-November, compared with about 50 per cent in June-August and 30 per cent in May, it pointed out.
The company raised ₹1,500 crore equity capital through a rights issue in August. This has improved its Tier 1 capital ratio by 200 basis points to 20.1 per cent as of Sept. 30, 2020. STFC ability to tap various sources for funds over the past three to four months, including from banks, capital markets, and securitisation, indicates an improvement in funding conditions.
The company’s reported stage-3 (more than 90 days past due) loans at 7.3 per cent of gross loans at end-September 2020, down from 8 per cent a quarter ago. The improvement in asset quality was helped by a six-month moratorium on loan repayment that lasted until end-August and financial savings of borrowers.
About three per cent of STFC’s gross loans are expected to be stressed as mobility in urban areas remains below pre-pandemic levels. The stressed borrowers mainly operate passenger vehicles such as taxis, school or office buses, and their number of trips has declined significantly, hurting earnings.
STFC’s earnings have a buffer to absorb a moderate deterioration amid challenging operating conditions.