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Shriram Trans Fin: Credit concerns weigh on profits - Views on News from Equitymaster
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  • Apr 30, 2014 - Shriram Trans Fin: Credit concerns weigh on profits

Shriram Trans Fin: Credit concerns weigh on profits
Apr 30, 2014

Shriram Transport Finance (STFC) declared its results for the fourth quarter and financial year 2013-14 (FY14). The institution grew its income from operations by 3.7% YoY but profits decelerated by 17.9%YoY during 4QFY14. For the full year FY14 the profits were seen down by 7.2% YoY. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grows 12.7% YoY in 4QFY14 and 20.8% YoY for full year FY14. This was largely supported by the growth in assets under management of 7%.
  • Net interest margins decline to 6.7% from 7.5% in FY13.
  • Other income falls by 44.2% for 4QFY14 but grows by whopping 172.5% YoY for the full year. Net income from securitization falls 29.1% YoY in FY14.
  • Net profit declines by 17.9% YoY in 4QFY14 on account of higher provisioning costs.
  • Gross NPAs increased to 3.9% in FY14 from 3.2% earlier, while the net NPA ratio increased to 0.8% in FY13 from 0.77 in FY13.
  • Board declared dividend of Rs 4 per share (after interim dividend of Rs 3 per share) for FY14 (dividend yield 0.5%).

Consolidated financial performance
Rs (m) 4QFY13 4QFY14 Change FY13 FY14 Change
Income from operations 19,070 21,495 12.7% 70,144 84,760 20.8%
Interest Expense 8,729 10,768 23.4% 30,590 42,022 37.4%
Net Interest Income 10,342 10,727 3.7% 39,555 42,738 8.0%
Net interest margin (%)       7.5% 6.7%  
Other Income 10 6 -44.2% 15 42 172.5%
Other Expense 2,378 2,814 18.4% 9,221 10,943 18.7%
Provisions and contingencies 2,325 3,176 36.6% 8,722 12,132 39.1%
Profit before tax 5,649 4,742 -16.1% 21,627 19,705 -8.9%
Tax 1,812 1,593 -12.1% 6,988 6,125 -12.3%
Share of Profit/(loss) of associates (2)     (5)    
Profit after tax/ (loss) 3,835 3,149 -17.9% 14,634 13,579 -7.2%
Net profit margin (%) 20.1% 14.6%   20.9% 16.0%  
No. of shares (m)         226.9  
Book value per share (Rs)         362.7  
P/BV (x)*         2.0  
* Book value as on 31st March 2014

What has driven performance in FY14?
  • Shriram Transport Finance reported a decline in profits for the fourth quarter in a row during 4QFY14. Higher provisioning costs and weak income performance weighed heavily on the bottom-line of the company. The profits for the full year stood 9% below our estimates on account of higher provisions for credit defaults.

  • The total assets under management have grown by mere 7% YoY for FY14. While the on-book assets have grown by healthy 16.0% YoY, the off-book assets have reported a de-growth of 8.8% on YoY basis. The AUM growth was largely driven by increased pre-owned CV financing that grew 17.0% YoY. However, the new CV segment has reported 34% decline on YoY basis during FY14. The company would continue to focus on the pre-owned CV segment.

    Assets under Management (AUM)-composition
    (Rs m) 4QFY13 % of total 4QFY14 % of total Change
    On-Book 314438 63% 364737 69% 16%
    Off-Book 182322 37% 166284 31% -9%
    Assets under management 496760   531021   7%

    New CV growth - a drag
    (Rs m) 4QFY13 % of total 4QFY14 % of total Change
    Assets under management 493548   528039   7%
    New CVs 95269 19% 62499 12% -34%
    Pre-owned CVs 398279 81% 465540 88% 17%

  • With slump in commercial vehicle sales and contraction in demand for truck loans, the loan growth for the company took a hit during FY14. The disbursements for FY14 have declined 10% YoY. With no expectation of sizeable loan pick-up in near future as cited by management, the revival in infrastructure and mining sectors should turnaround the business for lenders like Shriram Transport.

  • Subdued loan growth translated into weaker net interest income for the company. The net interest income has grown by mere 3.7% YoY during 4QFY14, while for the full year the growth was recorded at 8.0% YoY. Moreover, the interest costs too have spiked up for the quarter. Moreover, lower yields and drop in securitization income compressed the margins for FY14. The margins were seen down at 6.7% levels in FY14 from 7.5% in FY13. Given the healthy securitization income and liquid investments, we expect the margins to settle around 6%-7% levels the following year. However, cautious outlook on loan-to-vaue ratio of the company will also restrict significant expansion in margins.

  • While STFC's borrowing profile is largely tilted in favor of banks, the institution derived 80.5% of its funds from banks in FY14 as against 81.6% in FY13.

  • STFC's cost to income ratio has gone up to 26% in FY14 from 23% a year ago due to increased operating expenditure. Branch network expansion employee related expenses pushed up the costs for FY14. The company added 44 employees in the fourth quarter taking the total number of employees to 18,122. This was also followed by increase in employee benefit expenses during the year.

  • The company stands well capitalized with its capital adequacy at 23.4% at the end of FY14. This will enable it to sustain its loan growth in the medium term, and it does not foresee a requirement for additional capital at the moment however a lot of this depends on the performance of its subsidiaries as well as RBI guidelines on capital requirements.

  • Provisions against bad loans have increased by 24% YoY in FY14. That's because the company aims to provide higher against credit defaults on the grounds of prudence. The provision coverage ratio has also improved albeit marginally to 79.1% in FY14 from 76.4% in FY13. Asset quality, however, took a toll on account of tough environment. Gross NPAs have risen to 3.9% levels in FY14 from 3.2% a year ago. Also, net NPAs increased to 0.8% in FY14 from 0.77% in FY13. Going forward, we expect the provisioning costs to remain on the higher side.

  • Shrinkage in profits have brought down the return on equity (RoE) for the company. The RoE as at the end of FY14 stood at 16.2%, that is lower as compared to that in FY13 (20.5%).
What to expect?
At the current price of Rs 733, the stock is valued at 1.4 times our estimated FY16 adjusted book value.

Weak industrial output, spike in diesel prices, poor infrastructure activity and mining ban have taken a toll on the earnings of the company. Also, the credit demand had remained weak for major part of the year. We had already highlighted in the previous quarter that the earnings profile for the company will continue to remain weaker in the near term. As cited by the management, the second quarter of FY15 should witness improved picture with the clarity coming from net government and expected gradual pick-up in commercial vehicle demand. Nonetheless rural demand has remained intact and the company will continue to focus on rural belt to boost the business growth.

Given the cyclical nature of the business, the asset quality blips stand inevitable. Based on the management's inputs in the post result conference call, we believe that our estimates for margins and NPA provisioning warrant a revision. We will therefore soon review our estimates and update subscribers with the FY17 target price for the stock. .

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