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Shriram Transport: Squeezed margins - Views on News from Equitymaster
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Shriram Transport: Squeezed margins
Feb 5, 2008

Performance summary
  • Income from operations grows 74% YoY in 3QFY08 on the back of 70.4% YoY growth in disbursements.
  • Ratio of new to old CVs sustained at 28:72 in the company’s advance portfolio

  • Net interest margins drop to 7.7%, from 8.7% in 9mFY07.

  • Other income multiplies 8 fold despite lower fees due to high securitisation income.

  • Return on net worth improves from 20% in 3QFY07 to 26% in 3QFY08.

Rs (m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Income from operations 3,669 6,383 74.0% 9,642 16,731 73.5%
Interest Expense 1,868 3,681 97.1% 4,929 8,985 82.3%
Net Interest Income 1,801 2,702 50.0% 4,713 7,746 64.4%
Net interest margin (%)       8.7% 7.7%  
Other Income 23 225 878.3% 142 410 188.7%
Other Expense 538 784 45.7% 1,519 2,245 47.8%
Provisions and contingencies 405 525 29.6% 1,135 1,669 47.0%
Profit before tax 881 1,618 83.7% 2,201 4,233 92.3%
Tax 331 549 65.9% 780 1,490 91.0%
Profit after tax/ (loss) 550 1,069 94.4% 1,421 2,743 93.0%
Net profit margin (%) 15.0% 16.7%   14.7% 16.4%  
No. of shares (m)         203.1  
P/BV (x)*         4.5  
* Book value as on 31st December 2007

What has driven performance in 3QFY08?
  • Strong traction in old as well as new: Shriram Transport Finance Company (STFC) surpassed the sector average asset growth, reporting a 70.4% YoY growth in disbursements for 9mFY08. Pre-owned CVs continue to enjoy dominance in the company’s portfolio allocation (72% in 9mFY08). This was largely on the back of demand for working capital loans for the pre-owned CVs. However, the institution’s ability to re-price the new CVs, led to a substantial drop in the net interest margins (NIMs). Further, the aggressive growth in the new CV segment suggests that the company is willing to compromise on its margins for attaining a bigger balance sheet size.

    Old over new…
    (Rs m) 9mFY07 % of total 9mFY08 % of total Change
    Disbursements 17,926   30,540   70.4%
    New CVs 5,585 31.2% 8,537 28.0% 52.9%
    Pre-owned CVs 12,341 68.8% 22,003 72.0% 78.3%
               
    Assets under management 102,577   166,670   62.5%
    New CVs 28,962 28.2% 48,666 29.2% 68.0%
    Pre-owned CVs 73,615 71.8% 118,004 70.8% 60.3%

  • Other income–Volatile trend: The problem with STFC’s business model is its over-reliance on the vehicle financing industry as most of the other (fee) income are derived from the securitisation of assets that, as a practice, the company has intentionally reduced over the years. Fee to total income stood at 0.4% in 9mFY08 against 1.5% in 9mFY07. 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.

  • Lower costs: STFC’s cost to income ratio remained benign at 27% in 9mFY08 (29% in 9mFY07) due to its operating leverage. However, with the company now recruiting additional field officers, the costs are expected to escalate in the medium term.

  • Capital comfort: In order to fund the incremental growth in its loan book, the company in 3QFY08 issued 20 m shares by way of QIP (qualified institutional placement) to three institutional investors at Rs 300 per share. Further it issued 8 m warrants to Shriram Holdings (Madras) convertible into one equity share each at Rs 300 per share. Given this capital raising and assuming the warrants to get converted by FY10, we estimate STFC's adjusted book value to increase from Rs 53 per share in FY07 to Rs 89 in FY08 and going up to Rs 154 in FY10.

What to expect?
At the current price of Rs 401, the stock is fairly valued at 2.6 times our estimated FY10 adjusted book value. While the distinction of being the country’s largest asset financing NBFC, besides the niche presence in the high-yielding pre-owned CV financing business, earns STFC an edge over its peers in terms of net interest margins and provides substantial cushion in a rising interest rate, we believe that most of the medium term upsides have been factored into the stock price. Having said that, excessive reliance on offtake of commercial vehicles and possibility of delinquencies in the event of uneven agricultural harvest and firm interest rates are our lingering concerns with regard to the company.

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