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Shriram Trans Fin: Profits continue to shrink
Jan 29, 2014

Shriram Transport Finance (STFC) declared its results for the third quarter of the financial year 2013-14 (FY14). The institution grew its income from operations by 22% YoY but the profits declined 13.5% YoY during 3QFY14. The profits for the 9mFY14 also declined by 3.4% YoY. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 22.1% YoY in 3QFY14 with a healthy growth in on-book assets of 22.5% YoY.
  • Net interest margins moved down to 6.8% in 9mFY14 from higher levels of 7.5% in 9mFY13.
  • The other income also disappointed and was seen down by 11.8% YoY.
  • Net profit declined by 13.5% YoY in 3QFY14 due to higher provisioning costs and higher interest costs. For 9mFY14, the profits declined by 3.4% YoY.
  • Gross NPAs inched upwards to 3.6% from 2.9% earlier, while the net NPA ratio increased to 0.8% in 3QFY14 from 0.6% in 3QFY13.
  • The cost-income rato was at 26% for the third quarter of FY14.

Consolidated
Rs (m) 3QFY13 3QFY14 Change 9mFY13 9mFY14 Change
Income from operations 17,997 21,968 22.1% 51,074 63,266 23.9%
Interest Expense 7,926 11,230 41.7% 21,818 31,189 42.9%
Net Interest Income 10,071 10,738 6.6% 29,256 32,077 9.6%
Net interest margin (%)       7.5% 6.8%  
Other Income 2 2 -11.8% 5 36 632.7%
Other Expense 2,352 2,818 19.8% 6,886 8,194 19.0%
Provisions and contingencies 2,171 3,299 52.0% 6,397 8,956 40.0%
Profit before tax 5,551 4,623 -16.7% 15,978 14,963 -6.4%
Tax 1,796 1,375 -23.5% 5,176 4,532 -12.4%
Profit after tax/ (loss) 3,755 3,249 -13.5% 10,802 10,431 -3.4%
Net profit margin (%) 20.9% 14.8%   21.1% 16.5%  
No. of shares (m)         226.9  
Book value per share (Rs)         354.2  
P/BV (x)*         1.7  
* Book value as on 31st December 2013

What has driven performance in 3QFY14?
  • The shrinkage in profitability for two quarters in succession for Shriram Transport Finance (STFC) is reflective of the sluggish macro-economic conditions prevalent for some time now. The weak industrial production and manufacturing activities coupled with subdued consumption demand from the urban market has led to rise in delinquencies for the company. The demand from the rural market, however, continues to remain benign and the company remains focused on rural market.

  • Sensing the poor market conditions and therefore maintaining conservatism, the company has tactically slowed down on lending and prefers to tap the small vehicles segment. While the new vehicle asset financing has de-grown (down 27% YoY-3QFY14) for two consecutive quarters, used vehicle financing (23% YoY growth) still holds up well owing to the robust demand in the rural areas. The subdued market conditions have left little capital to buy new vehicles and hence the preference for commercial vehicles persists in the rural areas. Moreover, the company has reduced the loan-to-asset ratio and also increased its lending rates last year to battle the slowdown effect. The total assets under management for the quarter grew 15% YoY and the company expects to grow at a moderate pace with 10-12% growth by the en d of FY14.

    Assets under Management (AUM)-composition
    (Rs m) 3QFY13 % of total 3QFY14 % of total Change
    On-Book 310847 67% 379196 71% 22%
    Off-Book 154599 33% 154568 29% 0%
    Assets under management 465446   533764   15%

    New CVs continue to report de-growth
    (Rs m) 3QFY13 % of total 3QFY14 % of total Change
    Assets under management 463093   521982   13%
    New CVs 95323 21% 69852 13% -27%
    Pre-owned CVs 367770 79% 452130 87% 23%

  • The 13.5% YoY fall in the profitability during 3QFY14 can be largely attributed to the higher interest costs and higher provisions. The interest costs for the quarter have gone up as much as 42% YoY. The costs of funds have also remained on the higher side thus impacting the margins. The margins for 9mFY14 have contracted by 80 bps and were seen down to 6.8% in from higher levels of 7.5% a year ago. Fall in the securitization income and the inability to pass on the costs to the customers withheld the margins expansion during the quarter. That said, the company will endeavor to recoup the margins and get back to 7% levels.

  • The operating costs too spiked by 19.8% during the third quarter primarily on account of expansion and recovery efforts. The cost-income ratio stood at 26% during 3QFY14, up from 23% same quarter a year ago.

  • Higher provisions marred the profitability for the company. Elevated NPAs warranted higher provisions and hence the provisioning costs went up by 52% during the third quarter of FY14 thus impacting the profitability of the company. Fluctuation in freight rates and political issues in the Andhra Pradesh region of the Southern market exasperated the asset quality woes for the company. Moreover, the heavy commercial vehicles segment also witnessed maximum stress during 3QFY14. This led to the delay in the payment cycle and hence the gross NPAs plummeted to 3.6% levels in 3QFY14 from 2.9% in 3QFY13. The net NPAs too jumped to 0.8% levels in 3QFY14 from 0.6% in 3QFY13.

  • Consequent to profit decline, the RoEs for the company have dipped to 15% during 3QFY14.
What to expect?
At the current price of Rs 619, the stock is valued at 1.2 times our estimated FY16 adjusted book value.

The December quarter (3QFY14) earnings mirror the sharp slowdown in credit demand and asset quality pressures in the industry. STFC requires improving its operational efficiencies and restricting the asset quality slippages. However, this stands easier said than done given the tough macro challenges prevalent in the system and the subdued commercial vehicles market. While the tactical curtailment in disbursements might help out to tackle the slowdown, the earnings profile is expected to remain weak in the near term.

Given the cyclical nature of the business, the asset quality blips stand inevitable. That said, the recoveries for the company stand stronger and the long term prospects stay intact. We will continue to keep a close watch on the asset quality of the company and update investors if our estimates warrant a revision. Keeping in view the aforesaid pointers, we recommend investors to buy the stock of STFC as it serves as a good long-term bet. But please do restrict the holding to 3% of the overall portfolio.

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