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Shriram Trans Fin: NIMs see a dip - Views on News from Equitymaster
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Shriram Trans Fin: NIMs see a dip
Jan 25, 2013

Shriram Transport Finance (STFC) declared its results for the third quarter of the financial year 2012-13 (3QFY13). The institution grew its income from operations and profits at 11% and 10% YoY respectively.

Performance summary
  • Income from operations grows 16% YoY in 3QFY13 with a healthy growth in assets under management of 21%.
  • Net interest margins decrease to 7.5%, from 8% 9mFY12.
  • Other income increases by 261.5% in 3QFY12, for the half it increased by 352.6%.
  • Net profit grows by 19.4% YoY in 3QFY13 on higher other income and despite higher interest costs.
  • Gross NPAs increased to 2.89% from 2.79% earlier, while the net NPA ratio increased to 0.63% in 9mFY13 from 0.40% in 9mFY12.

Rs (m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Income from operations 15,484 17,955 16.0% 46,006 50,941 10.7%
Interest Expense 6,607 7,926 20.0% 18,760 21,818 16.3%
Net Interest Income 8,878 10,029 13.0% 27,246 29,123 6.9%
Net interest margin (%)       8.0% 7.5%  
Other Income 12 44 261.5% 31 139 352.6%
Other Expense 2,166 2,296 6.0% 6,715 6,725 0.1%
Provisions and contingencies 1,990 2,226 11.9% 5,885 6,559 11.5%
Profit before tax 4,734 5,551 17.3% 14,677 15,978 8.9%
Tax 1,590 1,796 12.9% 4,876 5,176 6.1%
Profit after tax/ (loss) 3,144 3,755 19.4% 9,801 10,802 10.2%
Net profit margin (%) 20.3% 20.9%   21.3% 21.2%  
No. of shares (m)         226.9  
Book value per share (Rs)         304.5  
P/BV (x)*         2.5  
* Book value as on 31st December 2012

What has driven performance in 9mFY13?
  • The country's largest NBFC in terms of asset size Shriram Transport Finance (STFC) continued to maintain its stronghold over financing used vehicles. Also better economic environment led to a comeback in growth. It fetched lower NIMs of 7.5% in 9mFY13 as against 8% in 9mFY12. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 25.7%, compared with the 17.7% levels seen in 9mFY12. STFC plans to sustain NIMs in excess of of 7% for the year and sees this remaining in a similar range going forward as well. The bank has done a little over Rs 30 bn of securitisation this year, and expects the same quantum in the 4th quarter. Demand for securitised laons has still not reduced as banks need to adhere to priority sector lending guidelines. As per the latest RBI guidelines, foreign banks with more than 20 branches (Standard Chartered, HSBC, and Citi) need to be treated on par with domestic lenders. Thus, their priority sector lending norms have been increased to 40% of annual lending from 32% earlier.

  • Demand for loans against new commercial vehicles (CVs) slowed so far in the year on account of the rising interest rate cycle and falling IIP (Index of Industrial Production) growth. However, by tapping into new rural areas, STFC managed to grow its overall disbursements by only 28% in 9mFY13. New CV disbursement increased by 14% during 9mFY13, compared to a decline seen last year ,with customers preferring smaller vehicles (LCVs). Growth has mainly been seen in the passenger and utlity vehicle segment. The company reiterates its AUM growth target at 15%, and expects similar levels next year.

    Disbursement growth picks up...
    (Rs m) 9mFY12 % of total 9mFY13 % of total Change
    Truck receivables 235,992   308,494   30.7%
    Disbursements 145,055   185,331   27.8%
    New CVs 28,431 19.6% 32,369 17.5% 13.9%
    Pre-owned CVs 116,625 80.4% 152,962 82.5% 31.2%

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 81.2% of its funds from banks in 9mFY13 as against 79.2% in 9mFY12. With the RBI's policy rate cut, and an expected fall in bank lending rates it may see some margin accretion on this account.

  • STFC's cost to income ratio remained benign at 23% in 9mFY13 due to its strong operating leverage. The company added 777 employees in the quarter on account of an improvement in the operating environment. The company stands well capitalized with its capital adequacy in excess of 19.2% at the end of 9mFY13. This will enable it to sustain its loan growth in the medium term, and it does not foresee a requirement for additional capital at the moment. However a lot of this depends on the performance of its subsidiaries as well as RBI guidelines on capital requirements.

  • Provisions for bad debts increased by 7.6% YoY in 9mFY13. Asset quality was maintained at similar levels even in a tough environment. Gross NPA increased to 2.89% in 9mFY13 from 2.79% earlier. However it came down versus the 3.06% levels seen at the end of March 2012. Net NPAs increased to 0.63% in 9mFY13 from 0.4% earlier.

What to expect?
At the current price of Rs 773, the stock is valued at 1.8 times our estimated FY15 adjusted book value. The company has put up a decent show despite the various uncertainties in the macro environment. It has also renewed its focus on its niche of pre-owned vehicles and is concentrating on the rural market, which continues to be robust. It wants to focus on yield management, and its older vehicle portfolio in order to maintain its NIMs at around 7-8% range. STFC expects conservative AUM growth for FY13 and a similar momentum to continue through next year as well. With securitization guidelines in its favour, STFC expects the same to pick up towards the last quarter of FY13. STFC is the biggest supplier of such securitized priority sector lending (PSL) paper, and for foreign banks as well as private sector banks to meet their PSL targets, they usually turn to players like Shriram. The institution's subsidiaries have also been performing satisfactorily. We reiterate our Hold view on the stock.

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