Shriram Transport Finance Company Limited (“STFC”), a listed entity on BSE Limited and the National Stock Exchange of India is issuing new bonds under its USD 3.5b Global Medium Term Note Programme. The USD bonds have an initial price guidance (“IPG”) of 4.45%.
With an expected maturity in July 2025, the secured notes have a charge on a certain pool of receivables that have been earmarked specifically for this issuance. Proceeds from this bond offering will be limited to the scope defined in its Social Finance Framework for eligible social projects. In addition, it may be used for onward lending and other activities, as permitted by the Reserve Bank of India’s External Commercial Borrowings Directions.
S&P and Fitch Ratings are expected to assign respective ‘BB-’ / ‘BB’ credit ratings to the bonds. The issuer, Shriram Transport Finance Company Limited is rated ’BB’ / ‘BB-’ by Fitch / S&P with stable outlooks.
SFTC is the flagship company of the Shriram Group – a large financial services group in India. To provide some context, the Shriram Group employs 24,160 employees across a network of 1,825 branches, 809 rural centres and partnerships with more than 500 private financiers.
Generally speaking, SFTC is a non-bank finance company (“NBFC”) that provides financing to drivers who do not qualify for bank loans due to the lack of a stable income. Most of its customers are low income earners, with a salary of around INR 10,000 to INR 15,000 (~USD 134 to ~USD 202).
Shriram Capital is SFTC’s largest shareholder with a 25.56% stake as at 30 September 2021. SFTC is merging with Shriram City Union Finance Limited and Shriram Capital Limited to form a new company called Shriram Finance Limited. Apart from providing financing for vehicles, the new company will also provide financial funding for the purchases of consumer goods and motorcycles.
The company’s total income is healthy. Total income, which mainly comprised of interest income, dividend income, rental income, fee & commission income, net gain on fair value changes, net gain on unrecognition of financial instruments under amortised cost category, increased 10.1% YoY to USD 1,259.7m during the 6-months ended 30 September 2021 (“1HFY22”). Impairment charges climbed 23.0% YoY to USD 284.9m while profit after tax fell slightly by 6.3% YoY to USD 126.7m.
It has a decent net interest margin of 6.41% in 1HFY22, down slightly from 6.54% in 1HFY21. NBFCs are required to maintain higher capital ratios than banks. The group’s capital adequacy ratios of 23.21% (1HFY22) and 23.44% (1HFY21) have been above the regulatory minimum of 15%. Tier 1 capital ratio was about 21.06% at 1HFY22.
Furthermore, SFTC has an adequate short term liquidity cushion with USD 7.72b of short term inflows in 2QFY22 and USD 5.16b of short term outflows. Group inflows have consistently exceeded outflows over recent reporting periods. Over the last few quarters, SFTC successfully raised more than USD 1b through deposits, securitizations, bonds and term loans, and its financing capacity and liquidity are quite good.
Investors who would like exposure to India’s microfinance sector may consider the new USD Social bonds. As a pricing reference, the company raised USD 725m through a secured bond last year. With a coupon rate of 4.4%, the USD 725m bond will mature in March 2024. As of 10 January 2022, the March 2024 bond is trading at an indicative yield-to-maturity of 3.59%.
Declaration: For or specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.
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