Shriram Transport Finance fell over 19% during the day, before closing 11.83% lower at ₹1,144.85 on Wednesday.
Mumbai: Shares of Shriram Transport Finance Co. Ltd tanked on Wednesday after its annual report revealed a large corporate guarantee to a group holding company.
Shriram Transport Finance fell over 19% during the day, before closing 11.83% lower at ₹1,144.85.
The company’s 2017-18 annual report showed that it has an outstanding corporate guarantee of ₹870 crore to SVL Ltd, formerly Shriram Industrial Holdings Ltd, the unlisted holding company of non-financial businesses of the Shriram group.
SVL had issued ₹650 crore of zero coupon non-convertible debentures (NCDs) in June 2015, maturing on 28 June 2019. Outstanding guarantee of ₹870 crore as on 18 March includes accrued interest, disclosure around the guarantee. SVL invests in infrastructure, engineering procurement and construction and renewable power.
Analysts said the balance sheet exposure is a potential risk. “With SVL/subsidiaries likely under financial stress, NCD repayment may be an issue. Other group companies could aid in repayment, but if guarantee is invoked and liability devolves on Shriram Transport Finance Ltd, its book value may be hit by 4-5%. Additional provision may be needed under IndAS, but we await clarity,” said Jefferies in a note on 3 July.
However, Jefferies has retained buy rating on the stock, though the company’s non-funded exposure is a negative. The research firm is also constructive on its commercial vehicles outlook. It believes strong loan growth, stable net interest margin and falling credit costs should drive 42% EPS CAGR and 80bps return on asset (ROA) expansion over FY18-20.
According to Morgan Stanley, the exposure could hurt its FY19 earnings per share (EPS) by up to 21% and increase FY19 credit costs by up to 85 basis points. It warned that this could delay the earnings recovery and re-rating at the stock, which could weigh on the stock’s near-term performance.
“Shriram EPC has been referred to NCLT and, hence, there is a meaningful risk of this balance sheet exposure becoming a liability for Shriram Transport Finance Company…We await more clarity from the company on the exposure and potential coping measures. IND AS reporting beginning Q1FY19 should likely help crystallise the impact as early as Q1FY19,” Morgan Stanley said in a note on 3 July.
Meanwhile, the company said in a press statement that apart from this corporate guarantee, it has not extended any fresh guarantee for SVL Ltd and the corporate guarantee is secured by pledge of shares of SVL Ltd. It added that the guarantee was duly approved by the board of directors of Shriram Transport Finance and was appropriately disclosed in the documents available in public domain.
“The promoters of Shriram Transport Finance Company are also addressing the above with SVL Group to get the settlement of dues on or before the due date, failing which, the promoters/promoter group of our company will address through alternate mechanisms to settle the dues,” the company statement said.