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Shriram Trans Fin: No surprises in performance - Views on News from Equitymaster
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Shriram Trans Fin: No surprises in performance
May 4, 2015

Shriram Transport Finance (STFC) declared its results for the fourth quarter and financial year ended March 2015 (FY15). The institution grew its net interest income by 5.4% YoY while the profits declined by 24% YoY in FY15. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grows by modest 8.3% YoY in FY15 on the back of 10.9% YoY growth in assets under management during FY15.
  • Net interest margins remained stable at around 6.6% in FY15.
  • Other income declines by staggering 57% YoY. Net income from securitization fell steeply during FY15.
  • Net profit declines by 24% YoY in FY15 on account of higher provisioning costs due to slippage in asset quality at subsidiary Shriram Equipment Finance.
  • Gross and net NPAs remained stable at 3.8% and 0.8% respectively on YoY basis.
Consolidated Financial performance snapshot
Rs (m) 4QFY14 4QFY15 Change FY14 FY15 Change
Income from operations 21,490 24,208 12.6% 84,739 91,768 8.3%
Interest Expense 10,833 12,528 15.6% 42,022 46,747 11.2%
Net Interest Income 10,657 11,680 9.6% 42,717 45,021 5.4%
Net interest margin (%)       6.7% 6.6%  
Other Income 10 3 -70.0% 63 27 -57.1%
Other Expense 2,749 3,448 25.4% 10,943 12,432 13.6%
Provisions and contingencies 3,176 5,731 80.4% 12,132 16,122 32.9%
Profit before tax 4,742 2,504 -47.2% 19,705 16,494 -16.3%
Tax 1,593 1,661 4.3% 6,125 6,211 1.4%
Profit after tax/ (loss) 3,149 843 -73.2% 13,580 10,283 -24.3%
Net profit margin (%) 14.7% 3.5%   16.0% 11.2%  
No. of shares (m)         226.9  
Book value per share (Rs)         405.5  
P/BV (x)*         2.0  
* Book value as on 31st March 2015

What has driven performance in FY15?
  • The income pattern of the borrowers of STFC is extremely vulnerable to economic growth and investment activity. The sectors that traditionally motivate higher demand for commercial vehicles faced lower traction over the last two years. This was, however, not the first time that STFC faced the cyclical pressure on asset quality. The NBFC responded by getting very cautious about lending quality even if that came at the cost of lower growth.

    New CV segment continues to languish
    (Rs m) FY14 % of total FY15 % of total Change
    Assets under management 527,038   584,223   10.9%
    New CVs 62,498 11.9% 46,802 8.0% -25.1%
    Pre-owned CVs 464,540 88.1% 537,421 92.0% 15.7%

  • The business performance has remained muted with assets under management (AUM) growing at a sluggish rate. The new CV segment continues to languish, declining 25% YoY. While the Used CV segment has reported 15.7% YoY growth in FY15, STFC's strong alliances and the regulatory upside for replacement of old trucks can offer a boost to this segment over the next few years.

  • STFC's margins remained stable at around 6.6% levels in FY15. The management would continue to bring it back to 7.0% levels.

  • STFC's borrowing profile continued to remain tilted towards banks with 81% of funding coming from banks during FY15.

  • The provision coverage ratio stood at healthy 80% during FY15.

  • Capital adequacy ratio for the company has remained healthy at 20.6%. RoEs for STFC have come in slightly lower at 14% levels during FY15, from 16% in FY14.
What to expect?
The stock of STFC corrected by around 15% after the FY15 results were announced. At the current price of Rs 830, the stock is attractively valued at 1.4 times our FY18 estimated adjusted book value.

As we had mentioned in our StockSelect report, overall FY15 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. However, despite the higher provision costs for Shriram Equipment Finance, the overall margins and asset quality for the company has remained stable.

There have been no surprises in the performance of the company in terms of growth and asset quality. The profits for FY15 are about 15% lower than our estimates. However, given the cyclicality in the company's business, we believe that the profitability will normalize over the next 3 years.

Hence, according to us, investors should take advantage of the valuations to buy more of the stock. A gentle reminder that please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your overall portfolio.

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