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Shriram Trans Fin.: Margins ready to take off - Views on News from Equitymaster

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Shriram Trans Fin.: Margins ready to take off
May 5, 2010

Shriram Transport Finance (STFC) declared its FY10 results. The institution grew its interest income and profits at 20% and 43% YoY respectively.

Performance summary
  • Interest income grows 20% YoY in FY10 despite negligible growth in assets under management. The same is due to sale of assets on securitization.
  • Net interest margins improve to 7.3%, from 7.2% in FY09; with lesser pressure on loan yields. Incremental lending skewed towards used vehicles.
  • Other income grows by 35% due to higher proportion of income from securitisation.
  • Net profits grow by 43% YoY in FY10 aided by lower operating costs.
  • Net NPA ratio declined from 0.8% FY09 to 0.7% in FY10.

Rs (m) 4QFY09 4QFY10 Change FY09 FY10 Change
Income from operations 9,623 11,943 24.1% 36,592 44,028 20.3%
Interest Expense 5,265 5,731 8.9% 19,777 22,468 13.6%
Net Interest Income 4,358 6,212 42.5% 16,815 21,560 28.2%
Net interest margin (%)       7.2% 7.3%  
Other Income 246 350 42.3% 719 968 34.6%
Other Expense 1,435 1,413 -1.5% 5,270 5,176 -1.8%
Provisions and contingencies 819 1,022 24.8% 3,058 4,107 34.3%
Profit before tax 2,350 4,127 75.6% 9,206 13,245 43.9%
Tax 812 1,482 82.5% 3,082 4,515 46.5%
Profit after tax/ (loss) 1,538 2,645 72.0% 6,124 8,730 42.6%
Net profit margin (%) 16.0% 22.1%   16.7% 19.8%  
No. of shares (m)       203.5 212.8  
Book value per share (Rs)         170.4  
P/BV (x)*         3.1  
* Book value as on 31st March 2010

What has driven performance in FY10?
  • The country's largest NBFC in terms of asset size Shriram Transport Finance continued to maintain its stronghold over financing used vehicles and optimsed on the same. It fetched marginally higher NIM of 7.3% in FY10 as against 7.2% in FY09. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 30% and sees its assets growing at annual rate of 25% over the next 3 years without equity dilution. STFC raised funds through non convertibles debentures in FY10.

    Demand for loans against pre-owned commercial vehicles has continued to support the business of Shriram Transport Finance (STFC) even in difficult times. The last quarter infact only acted as a sweetener. With interest rates cooling off, STFC managed to grow its disbursements at an accelerated pace. However, with securitisation of most of the inctremenmtal and long duration assets the growth in AUMs was flat. The growth in disbursements in FY10 was primarily supported by disbursement for pre-owned vehicles. The company's assets under management (AUM) in terms of new and pre-owned vehicles were re-balanced with older vehicles enjoying a larger composition. The pressure on yields, was also released in the latter half of FY10 and improved the margins which increased to 7.3%, from 7.2% in FY09.

    Balanced growth in assets...
    (Rs m) FY09 % of total FY10 % of total Change
    Truck receivables 179,215   179,461   0.1%
               
    Disbursements 227,957   281,790   23.6%
    New CVs 97,043 28.4% 118,294 42.0% 21.9%
    Pre-owned CVs 18,611 8.2% 28,541 10.1% 53.4%

  • STFC has outlined its plans of getting into the old tractor financing and freight bill discounting businesses. The company has also partnered with more than 500 private financiers to leverage their presence and access new customers. In its results conference call, the management of STFC threw light on the new business areas such as electronic trading of trucks (e-truck bazaars), auctioning of trucks and sale of refurbished branded trucks that it is looking to grow. STFC's plans of financing CVs and used trucks had market sizes of Rs 70 bn and Rs 190 bn respectively in FY09. These are expected to grow at an annual rate of 30% until 2012 with the incremental spending on roads and agriculture. The company's truck trading business through Truck Bazaars is expected to be a larger fee generator going forward.

  • With STFC's borrowing profile now largely tilted in favour of banks, the fall in cost of bank funding helped the company pass on the lower rates to customers. The institution derived 82% of its funds from banks in FY10 as against 84% in FY09. Going forward with better credit rating and increased institutional funding the NIMs are expected to remain in the range of 7.5% to 8%.

  • STFC's cost to income ratio remained benign at 24% in FY10 (31% in FY09) due to its operating leverage. The company's employee costs have risen by 9% YoY in FY10.

What to expect?
At the current price of Rs 592, the stock is valued at 2.8 times our estimated FY12 adjusted book value. STFC's niche presence in the high-yielding pre-owned CV financing business earns it an edge over its peers in terms of net interest margins and provides substantial cushion in an economic downturn. Further, the NBFC's asset valuation and loan recovery skills are verified in the low delinquency levels. We also derive comfort from the fact that the company's asset growth as well as margins so far have been within our estimated levels. We retain our positive view on the stock

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