The share price of Shriram Transport Finance Corporation (STFC) witnessed its sharpest fall in 19 months on Wednesday as global research firm Jefferies said one of the company’s unlisted subsidiary, SVL Ltd, may have inadequate cash flows to service debt raised via non convertible debentures (NCDs).

Another research house, Morgan Stanley, raised concerns over re-rating of STFC as well.

The STFC annual report has brought to light that the company has provided a guarantee of ₹870 crore for the NCDs issued by SVL. The STFC share on Wednesday fell over 18 per cent to touch a low of ₹1,047 on the BSE and recovered some ground before it could close at ₹1,144.

“If SVL defaults on the NCDs and the guarantee is invoked, the potential hit to Shriram Transport’s book value could be around 4 per cent post tax (₹29/ share),” Jefferies analysts wrote in their report. “Cash flows at SVL and subsidiaries may be inadequate to service the NCD, but other companies within the Shriram Group may potentially refinance/aid in repayment.”

The Morgan Stanley report said STFC’s FY19 earnings per share could be hurt by up to 21 per cent and increase the company’s credit cost by up to 85 basis points.

“Shriram EPC is a subsidiary of SVL, which has been referred to NCLT and hence there is a meaningful risk of this off-balance sheet exposure becoming a liability for STFC,” Morgan Stanley said. “This computes to 3.8 per cent and 3.2 per cent of our FY19 and FY20 book value per share.”

Morgan Stanley further said it expects a delay in earnings recovery and re-rating of STFC stock, too. “We note that STFC has made significant provisions in recent years. We await more clarity from the company on the exposure and potential coping measures,” it added.

In a release, STFC said it had given corporate guarantee for NCDs issued by SVL in June 2015. Apart from this corporate guarantee, STFC has not extended any fresh guarantee for SVL. The corporate guarantee was secured by pledge of shares of SVL.

“This guarantee was duly approved by the board of directors of STFC and the same was appropriately disclosed in the documents available in public domain on a timely manner,” the release said.

“The NCDs fall due for maturity after a year from now in June 2019. SVL, its promoters / promoter group, and its associates, have enough resources to honour the payment of this loan whenever due and payable has reassured the same. The promoters of STFC are also addressing the above with SVL group to get the settlement of the 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.”

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