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Shriram Trans Fin: Growth remains elusive - Views on News from Equitymaster
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Shriram Trans Fin: Growth remains elusive
Mar 14, 2015

Shriram Transport Finance (STFC) declared its results for the third quarter of the financial year (3QFY15). The institution grew its net interest income by mere 4% YoY; however, the profits have declined by 9.5% YoY in 9mFY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grows by modest 6.8% YoY in 9mFY15 on the back of 3.3% YoY growth in assets under management during 9mFY15.
  • Net interest margins moved down to 6.6% from 6.8% in 9mFY14.
  • Other income declines by staggering 55% YoY. Net income from securitization fell steeply during 3QFY15.
  • Net profit declines by 9.5% YoY in 9mFY15 due to poor income performance and higher credit costs.
  • Gross and net NPAs remained stable at 3.6% and 0.8% respectively on YoY basis.
Consolidated Financial performance snapshot
Rs (m) 3QFY14 3QFY15 Change 9mFY14 9mFY15 Change
Income from operations 21,968 23,457 6.8% 63,251 67,556 6.8%
Interest Expense 11,230 12,061 7.4% 31,189 34,219 9.7%
Net Interest Income 10,738 11,396 6.1% 32,062 33,337 4.0%
Net interest margin (%)       6.8% 6.6%  
Other Income 2 11 633.3% 51 23 -54.9%
Other Expense 2,818 3,087 9.5% 8,194 8,978 9.6%
Provisions and contingencies 3,298 3,482 5.6% 8,956 10,391 16.0%
Profit before tax 4,624 4,838 4.6% 14,963 13,991 -6.5%
Tax 1,375 1,626 18.3% 4,532 4,550 0.4%
Profit after tax/ (loss) 3,249 3,212 -1.1% 10,431 9,441 -9.5%
Net profit margin (%) 14.8% 13.7%   16.5% 14.0%  
No. of shares (m)         226.9  
Book value per share (Rs)         389.4  
P/BV (x)*         2.3  
* Book value as on 31st December 2014

What has driven performance in 9mFY15?
  • The demand for new and used trucks remained sluggish on the back of weak industrial output and poor infrastructure activity. With slump in commercial vehicle sales and contraction in demand for truck loans, the loan growth for the company have also taken a hit.

    Sluggish AUM growth; New CV segment continues to languish
    (Rs m) 9mFY14 % of total 9mFY15 % of total Change
    Assets under management 537,815   555,467   3.3%
    New CVs 69,852 13.0% 47,845 8.6% -31.5%
    Pre-owned CVs 452,130 84.1% 516,148 92.9% 14.2%

  • Higher credit costs and poor income performance has weighed down the profitability of the company. Asset quality pressures continue to dent the earnings performance of Shriram Transport Finance. The profits for the first nine months were hurt largely due to poor other income performance, sluggish top-line and higher credit costs.

  • The business performance has remained muted with assets under management (AUM) growing by sluggish 3.3% YoY during 9mFY15. The new CV segment continues to languish, declining 32% YoY. While the Used CV segment has reported a tepid 14.2% YoY growth, indicating CV financing business is yet to pick up.

  • While the yields have improved, the margins' fall was contained at around 6.6% levels (6.8% in 9mFY14). While the margin pressures are here to stay, the management would continue to strive back to 7.0% levels.

  • STFC's borrowing profile continued to remain tilted towards banks with 81% of funding coming from banks during 3QFY15.

  • The provision coverage ratio stood at healthy 79% during 9mFY15.

  • Capital adequacy ratio for the company has remained healthy at 21%. But RoEs for STFC have dipped to 14% levels during 9mFY15, down from higher levels of 16.8% in 9mFY14.
What to expect?
At the current price of Rs 1,186, the stock is valued at 2.1 times our FY17 estimated adjusted book value. Overall 9mFY15 was rather disappointing for the company given the fact that clarity of economic revival, uncertainty in monsoons and prolonged resolution of mining activity issues failed to support the business growth. Although loan growth may pick up in coming quarters, margins and asset quality are expected to remain under pressure. We recommend investors to wait before buying the stock at more attractive valuations. Please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 4-5% of your portfolio.

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