Financial markets remain risk averse

The economic growth slowdown in India has started hitting hard the corporate world such as Shriram Transport Finance Co Ltd (STFC), the largest financier of vehicles which had its rating downgraded.

S&P Global Ratings has revised its outlook STFC on to negative from stable, pointing out that slower economic growth and weaker economic activity could lower vehicle utilization, affecting the cash flows of road transport operators.

Performance of the commercial vehicle industry is closely correlated to the economy because infrastructure, real estate and consumption drive movement of goods and material across the country, said S&P on 16 Dec 2019.

S&P revised the outlook to negative to reflect the increased risk of a deterioration in STFC’s asset quality, which could also affect availability of credit to the company over the next 12 months or so.

“We have progressively lowered our growth expectations for India during 2019 such that we now expect the country’s GDP to grow at 5.1% in fiscal 2020 (year ending 31 March 2020) and 6.5% in fiscal 2021,” said S&P.

“At the same time, we affirmed our ‘BB+’ long-term and ‘B’ short-term issuer credit ratings on the company. We also affirmed our ‘BB+’ long-term issue rating on STFC’s senior secured notes,” said S&P.

India-based STFC is a commercial vehicle finance company that predominantly finances used trucks.

STFC’s strong business position and capitalization will continue to underpin the ratings, noted S&P of the largest financier of commercial vehicles in India.

STFC reported net interest margin remains high at 7.2%, despite declining, supporting profitability and capital ratios. As of 30 Sept 2019, STFC’s reported return on assets is 2.5%, Tier 1 capital ratio is 16.3%, and total capital adequacy ratio is 20.4%.

“We expect growth and profitability to remain under pressure for STFC, given market funding conditions continue to be tight,” said S&P.

STFC’s assets under management increased about 4% year-on-year for the half year ended 30 Sept 2019, with growth mainly from securitization and direct assignment, while balance sheet assets showed a de-growth.

STFC’s cost of funds has risen in the past one year due to tighter funding and liquidity conditions.

The company has diversified its sources through overseas (12% of borrowings as of 30 Sept 2019, from 3% a year ago) and retail bond issuances and also relied on securitization during this time (25% of borrowings from 19% a year ago).

A deterioration in asset quality will likely lower the credit available to STFC because Indian financial markets remain risk averse and finance companies operate in a confidence-sensitive sector, said S&P. fiinews.com