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Shriram Trans Fin: The 'new CVs' boost - Views on News from Equitymaster

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Shriram Trans Fin: The 'new CVs' boost
Jan 31, 2011

Shriram Transport Finance (STFC) declared its 3QFY11 results. The institution grew its interest income and profits at 19% and 27% YoY respectively.

Performance summary
  • Income from operations grows 19% YoY in 3QFY11 (21% in 9mFY11) with a healthy growth in assets under management of 20%. Income from securitization grows over 3 times in the 9 month period.
  • Net interest margins (on assets under management) improve to 8.5% from 7.1% 9mFY11; with lesser pressure on loan yields and higher spreads. Incremental lending skewed towards pre-owned vehicles in line with the company's forte.
  • Net profits grow by 46% YoY in 9mFY11 aided by growth in net interest income, and a jump in other income.
  • An exceptional item relating to 0.25% standard asset provisioning was provided on all outstanding standard assets - as per RBI guidelines. If not for this item normalized profits would have increased 55% YoY for 9mFY11 and 51% YoY for 3QFY11.
  • Net NPA ratio declined from 0.7% in 9mFY10 to 0.5% in 9mFY11.


Standalone performance snapshot
Rs (m) 3QFY10 3QFY11 Change 9mFY10 9mFY11 Change
Income from operations  11,467  13,687 19.4%      32,059     38,925 21.4%
Interest Expense    5,828     5,644 -3.2%      16,738     17,062 1.9%
Net Interest Income    5,639     8,042 42.6%      15,321     21,862 42.7%
Net interest margin (%) ^       7.1% 8.5%  
Other Income       202        437 116.5%    618 1,497 142.2%
Other Expense    1,247     2,127 70.6% 3,762 5,657 50.4%
Provisions and contingencies    1,006     1,235 22.7% 3,057 3,779 23.6%
Profit before tax    3,587     5,117 42.6% 9,119     13,923 52.7%
Exceptional items**           -          553          -      553  
Tax    1,219     1,551 27.2% 3,033 4,478 47.7%
Profit after tax/ (loss)    2,368     3,014 27.3% 6,087 8,893 46.1%
Net profit margin (%) 20.7% 22.0%   19.0% 22.8%  
No. of shares (m)       212.8 226.2  
Book value per share (Rs)         204.7  
P/BV (x)*             3.3  
* Book value as on 31st December 2010   ** 0.25% standard asset provisioning has been taken as an exceptional item
(in line with the Mahindra Finance result analysis -3QFY11), as subsequently the provisioning will only be on the incremental asset portfolio
^ On Assets under management

What has driven performance in 9mFY11?
  • The country's largest NBFC as per asset size Shriram Transport Finance (STFC) continued to maintain its stronghold over financing used vehicles. It fetched higher NIMs (on AUM - including securitised assets) of 8.5% in 9mFY11 as against 7.1% in 9mFY10. The NIMs on actual advances in 9mFY11 were however marginally lower at 6.2% than 6.8% in 9mFY10. The institution sustained robust return on equity of 28% in 9mFY11.

  • Demand for loans against pre-owned commercial vehicles continued to support STFC's business even in a rising interest rate cycle. STFC managed to grow its disbursements at an accelerated pace of 27%. The growth in disbursements in 9mFY11 also saw a strong performance from the new CV space. It increased at a robust pace of 59% during 9mFY11. However, with securitisation of most of the incremental and long duration assets the growth in receivables was pretty much flat. The company's assets under management (AUM) in terms of new and pre-owned vehicles were re-balanced with older vehicles enjoying a larger composition. The improvement of yields as well as an increase in spreads contributed to the increase in margins (NIMs).

    Balanced growth in assets...
    (Rs m) 9mFY10 % of total 9mFY11 % of total Change
    Truck receivables  215,493   224,044   4.0%
    Disbursements  107,806     136,825   26.9%
    New CVs     20,409 18.9%     32,428 23.7% 58.9%
    Pre-owned CVs     87,397 81.1%   104,397 76.3% 19.5%

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 80% of its funds from banks in 3QFY11 as against 86% in 3QFY10. Last year, the fall in cost of bank funding helped the company pass on the lower rates to customers. However, with the base rate regime now in place and rising key policy rates, the company may face some pressure in terms of interest costs as borrowing may get expensive. Nevertheless, due to better credit rating and increased institutional funding the NIMs are expected to sustain around 7.0%.

  • STFC's cost to income ratio remained benign at 25% in 3QFY11 (21% in 3QFY10) due to its operating leverage. For the 9 month period it remained flat at 24%. The company added 1,011 new employees in the quarter and thus employee costs rose sharply by 72% YoY in 3QFY11. With a branch network of 487 offices, and additional employees, the company seems well poised for growth and to benefit from higher rural incomes. The company stands well capitalized with its capital adequacy in excess of 24% at the end of 9mFY11 (17% in FY10). This will enable it to sustain its loan growth in the medium term.

What to expect?
At the current price of Rs 663, the stock is valued at 2.1 times our estimated FY13 adjusted book value. The company still remains bullish on the used CV space, as it has not seen a significant slowdown in disbursements even in the higher interest rate cycle and inflationary scenario. This can be seen from its robust disbursement growth at 27%, with improved asset quality. The proportion of new CVs in its disbursement mix has increased along with general rural buoyancy. However since these CVs are more expensive, customers may shy away from these vehicles now due to higher financing rates. This will push customers to used commercial vehicles, which anyway provide higher yields for Shriram Transport. The company also does not have much competition in this used vehicle space. Its entry into the high potential construction equipment financing space is also seeing some traction.

The company securitizes around 30-35% of its assets under management to banks under the priority sector lending (PSL) norms. The company is expecting to see increased demand on the same in the next quarter, as banks try and meet their PSL targets for the fiscal year. The company has already seen an impressive growth in income from securitization, which it will further consolidate on towards the end of the year. The company has improved its NIMs and is expected to not see deterioration in the same, along with our expectations. We remain a bit cautious on the stock from a medium term perspective in light of the liquidity crunch and rising interest rates and inflation. Once these concerns ease up a bit, it will make sense to hold onto the stock. Researchpro subscribers can view our updates here.

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