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Shriram Transport Fin.: Niche presence undisturbed - Views on News from Equitymaster
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  • Jan 23, 2009 - Shriram Transport Fin.: Niche presence undisturbed

Shriram Transport Fin.: Niche presence undisturbed
Jan 23, 2009

Performance summary
  • Interest income grows 48% YoY in 3QFY09; 59% YoY during 9mFY09. Assets under management grow by a sterling 36% YoY despite pressure on costs.
  • Net interest margins drop to 7.3%, from 7.8% in 9mFY08 due to higher proportion and cost of borrowing from banks.
  • Other income drops by 30% during the quarter due to lower proportion of income from securitisation.
  • Net margin for the quarter falls by 1.5% on the back of higher provisioning costs. For the nine month period, the same improves by 0.6%.


Rs (m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Income from operations 6,543 9,694 48.2% 16,888 26,799 58.7%
Interest Expense 3,728 5,542 48.7% 9,032 14,512 60.7%
Net Interest Income 2,815 4,152 47.5% 7,856 12,287 56.4%
Net interest margin (%) 7.8% 7.3%
Other Income 229 161 -29.7% 408 469 15.0%
Other Expense 867 1,293 49.1% 2,327 3,837 64.9%
Provisions and contingencies 507 752 48.3% 1,651 2,064 25.0%
Profit before tax 1,670 2,268 35.8% 4,286 6,855 59.9%
Tax 562 776 38.1% 1,506 2,270 50.7%
Profit after tax/ (loss) 1,108 1,492 34.7% 2,780 4,585 64.9%
Net profit margin (%) 16.9% 15.4% 16.5% 17.1%
No. of shares (m) 191.1 203.5
Book value per share (Rs) 105.0
P/BV (x)* 1.8
* Book value as on 30th September 2008

What has driven performance in 3QFY09?
  • Although the economic meltdown, poor demand for commercial vehicles and firmness in interest rates did have an impact on commercial vehicle loans, the demand for pre owned vehicles continued to remain far stronger than that for new vehicles. STFC reported a drop of 25% in overall disbursements in 9mFY09, primarily due to 79% YoY fall in disbursement for new vehicles. The companys assets under management (AUM), however, grew by 36% YoY and remained well balanced in terms of mix of new and pre-owned vehicles. The institution maintains a loan to value ratio of 65% and intends to get into the old tractor financing and freight bill discounting businesses.

    Pre-owned vehicles save the day
    (Rs m) 3QFY08 % of total 3QFY09 % of total Change
    Disbursements 30,540   23,043   -24.5%
    New CVs 8,537 28.0% 1,756 7.6% -79.4%
    Pre owned CVs 22,003 72.0% 21,287 92.4% -3.3%
      9mFY08 % of total 9mFY09 % of total Change
    Assets under management 167,855   227,957   35.8%
    New CVs 48,667 29.0% 64,743 28.4% 33.0%
    Pre owned CVs 119,188 71.0% 163,214 71.6% 36.9%
    Truck receivables 131,479   186,666   42.0%

  • With STFCs borrowing profile now largely tilted in favour of banks, the rise in cost of funding took a toll on the companys net interest margins which declined by 0.5% (NIMs at 7.3% in 9mFY09). The same, however, continue to remain well above our estimate of 6.9% for the full year FY09. The institution marginally increased its proportion of retail borrowing due to the liquidity crunch in the banking sector and derived 85% of its funds from the retail segment in 3QFY09 as against 83% in 3QFY08. Going forward, with better credit rating and increased institutional funding the NIMs are expected to remain in the range of 7.5% to 8%.

  • STFCs business model continues to over-rely on the vehicle financing industry as most of the other (fee) incomes are derived from the securitisation of assets. Although as a practice, the company has reduced securitisation over the years, the tight liquidity conditions seems to have induced the company to go in for higher securitisation this quarter. Fee to total income stood at 0.1% in 9mFY09 against 0.4% in 9mFY08. Nevertheless, the company has started vending debit cards and mutual fund products through its sales points and these are expected to add to its revenues going forward.

  • STFCs cost to income ratio marginally increased from 28.2% in 9mFY08 to 30.0% in 9mFY09. Further, with the company having recruited nearly 383 additional employees and added 8 branches in the last quarter, the costs are expected to escalate in the medium term.

  • Although the gross NPAs increased marginally to 1.9% from 1.6% in 9mFY08, the Net NPAs declined to 0.9% in 9mFY09 from 1.0% due to higher provisioning.

What to expect?
At the current price of Rs 191, the stock is very attractively valued at 1.0 time our estimated FY11 adjusted book value. STFCs niche presence in the high-yielding pre-owned CV financing business earns it an edge over its peers in terms of net interest margins and provides substantial cushion in an economic downturn. Further, the NBFCs asset valuation and loan recovery skills are verified in the low delinquency levels. We also derive comfort from the fact that the companys asset growth as well as margins so far have been well above our estimated levels. We retain our view on the stock.

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