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Shriram Trans Fin: Healthy AUM growth - Views on News from Equitymaster

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Shriram Trans Fin: Healthy AUM growth

May 2, 2011

Shriram Transport Finance (STFC) declared its results for the financial year 2010-2011 (FY11). The NBFC has reported 37% YoY and 41% YoY growth in net interest income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Income from operations grows 19% YoY in FY11 (12% in 4QFY11) with a healthy growth in assets under management of 24%. Income from securitization grows over 2.4 times in the twelve month period.
  • Net interest margins (on assets under management) improve to 8.4% from 7.3% in FY10; with lesser pressure on loan yields and higher spreads.
  • Net profits grow by 41% YoY in FY11, and by 29% in 4QFY11 aided by growth in net interest income, and a jump in other income.
  • Net NPA ratio declined from 0.7% in FY10 to 0.4% in FY11.
  • The board recommended a final dividend of Rs 4 per equity share, (total dividend for the year Rs 6.5). This works out to a yield of around 1%.

Rs (m) 4QFY10 4QFY11 Change FY10 FY11 Change
Income from operations 11,932 13,377 12.1% 43,991 52,302 18.9%
Interest Expense 5,730 5,657 -1.3% 22,468 22,720 1.1%
Net Interest Income 6,202 7,720 24.5% 21,523 29,582 37.4%
Net interest margin (%)^       7.3% 8.4%  
Other Income 350 498 42.2% 968 1,995 106.0%
Other Expense 1,414 1,883 33.2% 5,176 7,540 45.7%
Provisions and contingencies 1,012 1,216 20.2% 4,069 5,548 36.3%
Profit before tax 4,126 5,119 24.0% 13,246 18,489 39.6%
Tax 1,482 1,713 15.5% 4,515 6,191 37.1%
Profit after tax/ (loss) 2,644 3,406 28.8% 8,731 12,299 40.9%
Net profit margin (%) 22.2% 25.5%   19.8% 23.5%  
No. of shares (m)         226.2  
Book value per share (Rs)         215.2  
P/BV (x)*         3.0  
* Book value as on 31st, March 2011    ^ On Assets under management

What has driven performance in FY11?
  • STFC, the country's largest NBFC as per size of assets under management (AUM) continued to maintain its stronghold over financing used vehicles. It fetched higher NIMs (on AUM - including securitised assets) of 8.4% in FY11 as against 7.3% in FY10. The institution sustained its robust return on equity of 28% in FY11.

  • 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 overall disbursements at an accelerated pace of 35%. The growth in disbursements in FY11 also saw a strong performance from the new CV space. It increased at a robust pace of 74% during FY11. However, with securitisation of most of the incremental and long duration assets the growth in receivables came in lower at 10%. The company's 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).

    New CVs get a fillip...
    (Rs m) FY10 % of total FY11 % of total Change
    Truck receivables 179,423   197,690   10.2%
    Disbursements 146,836   198,837   35.4%
    New CVs 28,542 19.4% 49,598 24.9% 73.8%
    Pre-owned CVs 118,294 80.6% 149,239 75.1% 26.2%

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 78% of its funds from banks in FY11 as against 82% in FY10. 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 8%.

  • The RBI is looking at monitoring the NBFC sector to a greater extent now, as per its recent set of regulations. It recently announced that bank funding to and buying of gold loans from (assignment) will not be classified as priority sector any longer. This affects STFC to some extent, since it earlier used give out gold loans on behalf of Shriram City Union. Also as per the latest guidelines on the industry, only loans to microfinance companies can be classified under priority sector loans (PSL). Bank loans directly to NBFC's like Shriram, Mahindra Finance, etc will not be classified under PSL any longer. However Shriram would always borrow on commercial terms, hence it will not be very much affected on this account.

  • What comes as a comfort for Shriram right now is that the RBI states that the off-balance sheet assets which are portfolios sold (securitised) to banks as priority sector loans, the categorisation will still continue. Thus STFC, which has been aggressively selling its portfolio to banks, which have to meet their PSL targets will not be affected very much. The RBI has set up a committee to go over the same, and only post this would one get an update on whether its off-balance sheet portfolio will also be affected.

  • STFC's cost to income ratio remained benign at 24% in FY11 (23% in FY10) due to its operating leverage. The company added 3,102 new employees in the quarter and thus employee costs rose sharply by 59% YoY in FY11. With a branch network of 488 offices, and additional employees, the company seems well poised for growth. The company stands well capitalized with its capital adequacy in excess of 24.8% at the end of FY11 (21% in FY10). This will enable it to sustain its loan growth in the medium term. Having said that, higher fuel costs, as well as higher interest rates as per the RBI's rate hike may lead to pressure on advance growth.

  • Its two subsidiaries Shriram Automall and Shriram Equipment Finance also started operations. The equipment finance company clocked in disbursements of Rs 6.6 bn and the Automall (a platform for second-hand vehicle dealers to transact) started operations in Chennai and Baroda with the Delhi branch in progress of opening.

What to expect?
At the current price of Rs 642, the stock is valued at 2 times our estimated FY13 adjusted book value. Profit growth came slightly higher than our estimates, although loan growth was in line with our broad estimates. However, interest rate hikes, fuel price hikes as well as regulatory impact on the sector are a few concerns. The RBI also increased the capital adequacy which NBFCs have to maintain to 15% from 12% previously. This reduces some of the growth headroom, available to the financier. The commercial vehicle industry is cyclical; the company saw a huge growth in its new vehicles portfolio on pent up demand. However, this is expected to moderate going forward. However, demand for financing old CVs may not take too much of a hit, since it is not very affected by business cycles. In light of the current demand environment, we will be re-looking our estimates and come out with a view shortly.

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