The company's net profit declined by 70% in the last quarter as it made Rs 910 crore of COVID-19 related provisions for the possible asset quality stress during the upcoming financial year.

The company’s management expects the next quarter to be a slow one, although loan demand for commercial vehicles to improve in the second quarter. The current credit cost run rate has increased from 2% to 2.4% and may rise to 3% in a worst-case scenario. The company’s long-term target remains 2%.

As of the last quarter, around 70% of the company’s loan portfolio is under moratorium. Collections were negatively impacted post the nationwide lockdown. The company was able to collect from only 23% of borrowers in April 2020. However, the company collected from 52% of borrowers in May 2020 with a total collection efficiency of 40%. It is expected to improve further in June and July with ease in lockdown.

Shriram Transport Finance is likely to be less impacted than other financiers given its larger portfolio of owner-drivers, which constitutes 75% of the company’s AUM. This mix of borrowers operates on shorter routes and transport essential commodities. Hence, they are likely to be less impacted compared to the larger fleet owners. These mix of borrowers are also not impacted by the driver shortage issue as they serve as owner-drivers, unlike larger fleet operators.

Agriculture is expected to be the only silver lining in the upcoming year for growth and the company is betting on a good Kharif season for an uptick. In the March quarter, rural assets under management (AUM) grew by 15% while urban assets shrank by 1%. Overall AUM growth was 5% YoY. The management said that agriculture will contribute to a greater extent this year.

However, with persisting demand constraint, the company continues to face pressure on the financial front. The Net Interest Margin compressed for the March quarter due to a hit on forex borrowing while increasing interest cost is also a concern. According to the management, the company has a liquidity buffer to last till September of this year. The company has also availed a moratorium from banks to maintain cash reserves.

Final Thoughts:

Uncertainty continues to persist as commercial vehicle demand continues to remain weak. It will continue to weigh on financial performance. The management expects the outlook to improve from the second quarter of the financial year. Until then, the strength of the franchise is going to be severely tested.

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