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Shriram Trans Fin: Flat profit growth

Feb 14, 2012

Shriram Transport Finance (STFC) declared its results for the third quarter of the financial year 2011-12 (3QFY12). The institution grew its income from operations and profits at 6.3% and 0.4% YoY respectively.

Performance summary
  • Income from operations grows 6.3% YoY in 3QFY12 with a healthy growth in assets under management of 16%.
  • Net interest margins decrease marginally to 7.7%, from 7.9% 9mFY11.
  • Other income increases by 7.4% in 3QFY12, for the half it increased by 7.8%.
  • Net profits remain flat, growing by only 0.4% YoY in 3QFY12 on account of higher provisioning and benign growth in Net Interest Income (NII).
  • Gross NPAs increased to 2.79% from 2.40% earlier, while the net NPA ratio declined to 0.40% in 9mFY12 from 0.47% in 9mFY11.

Rs (m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Income from operations 13,490 14,334 6.3% 38,660 42,451 9.8%
Interest Expense 5,924 6,350 7.2% 17,681 18,468 4.4%
Net Interest Income 7,566 7,985 5.5% 20,979 23,984 14.3%
Net interest margin (%)       7.9% 7.7%  
Other Income 418 449 7.4% 1,469 1,583 7.8%
Other Expense 1,855 1,969 6.1% 5,059 5,665 12.0%
Provisions and contingencies 1,565 1,920 22.7% 4,018 5,703 41.9%
Profit before tax 4,564 4,545 -0.4% 13,371 14,199 6.2%
Tax 1,551 1,518 -2.1% 4,478 4,705 5.1%
Profit after tax/ (loss) 3,014 3,027 0.4% 8,893 9,494 6.8%
Net profit margin (%) 22.3% 21.1%   23.0% 22.4%  
No. of shares (m)         226.2  
Book value per share (Rs)         236.0  
P/BV (x)*         2.3  
* Book value as on 31st December 2011

What has driven performance in 9mFY12?
  • The country's largest NBFC in terms of asset size Shriram Transport Finance (STFC) continued to maintain its stronghold over financing used vehicles, however uncertanity in the economic environment led to a slowdown in growth. It fetched slightly lower NIMs of 7.7% in 9mFY12 as against 7.9% in 9mFY11. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 23.5%, however this has declined from the 27.9% seen at the end of FY11. STFC plans to sustain NIMs of 7-8% for the year and sees this remaining in a similar range going forward as well. The bank has done Rs 30 bn of securitisation this year, but there is still no indication on what the final regulatory guidelines will be. Demand for the same has still not reduced as banks need to maintain priority sector lending guidelines.

  • Demand for loans against new commercial vehicles (CVs) slowed in the first half on account of the rising interest rate cycle and falling IIP (Index of Industrial Production) growth. STFC managed to grow its overall disbursements by only 6% in 9mFY12. Growth was much slower than what was seen at the end of FY11 (36% growth). New CV disbursement fell by 12% during 9mFY12, with customers preferring smaller vehicles. The company reduced its disbursement growth target to 10%, versus the 15% target earlier. The management expects to maintain its 15% AUM growth for the year, and believes it will be at similar levels next year.

    Disbursement growth slows...
    (Rs m) 9mFY11 % of total 9mFY12 % of total Change
    Truck receivables 224,044   235,992   5.3%
    Disbursements 136,825   145,055   6.0%
    New CVs 32,428 23.7% 28,431 19.6% -12.3%
    Pre-owned CVs 104,397 76.3% 116,625 80.4% 11.7%

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 79.2% of its funds from banks in 9mFY12 as against 79.8% in 9mFY11. 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, the company faced some pressure in terms of interest costs as borrowing may get more expensive. However with the RBI expected to cut rates, it may see some margin accretion on this account.

  • STFC's cost to income ratio remained benign at 22% in 9mFY11 due to its strong operating leverage. The company reduced 268 employees in the quarter on account of shifting a few employees within its subsidiaries Shriram Automall and Shriram Equipment Finance. However only when the environment improves will be bank opt for fresh hires. The company stands well capitalized with its capital adequacy in excess of 24.9% at the end of 9mFY12. This will enable it to sustain its loan growth in the medium term, and it does not foresee a requirement for additional capital.

  • Provisions increased in 3QFY12 on account of higher writeoffs and other general provisoning. Almost Rs 200 m was written off in areas exposed to the mining area in the states of Bellary. Some of the vehicles in this area have also been repossessed. However, on account of the increased provisioning net NPAs declined to 0.40% in 9mFY12 from 0.47% earlier.

What to expect?
At the current price of Rs 554, the stock is valued at 1.6 times our estimated FY14 adjusted book value. The company has put up a decent show despite the various uncertainties in the macro environment. This includes the RBI's interest rate policy as well as its regulatory stance. Diesel and other fuel prices have seen a hike. The company has also been conservative in fresh lending on account of uncertainties in the environment and has reduced its loan to value ratio to 65%. It has also mainly lent additional loans to its existing customer base. Consequently, growth has seen some slowdown, which we have factored into our estimates for the year. The company should comfortably manage a 15% AUM growth for FY12. Disbursement growth has been below par on account of increased competition in the new CV space. There have also been some write-offs on account of the company's exposure to projects in the mining belt on account of adverse regulations, however this has now been adequately provided for. The company has however been conservative in its provisioning stance and maintains a high coverage ratio (86.1%in 9mFY12). It also wants to focus on yield management, and its older vehicle portfolio in order to maintain its NIMs at 7-8%. Due the persistence of high interest rates, we have been conservative in our growth and asset quality estimates.

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