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Shriram Trans Fin: Profits down on provisioning - Views on News from Equitymaster

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Shriram Trans Fin: Profits down on provisioning
May 14, 2012

Shriram Transport Finance (STFC) declared its results for the financial year 2011-2012(FY12). The NBFC has reported 16% YoY and 7.5% YoY growth in net interest income and net profits respectively on a consolidated basis. Here is our analysis of the results.

Performance Summary
  • Income from operations grows 13% YoY in FY12 (12.5% in 4QFY12) with a lackluster growth in assets under management of 24%. Income from securitization grows 34% in the twelve month period.
  • Net interest margins (on assets under management) contract to 7.5% from 7.8% in FY11; with pressure on loan yields and lower spreads.
  • Net profits grow by 7.5% YoY in FY12, and fall by 4% in 4QFY12 on a consolidated basis (includes on account of slower growth in net interest income, a fall in other income and higher provisioning.
  • On a standalone basis, profits were down 9.6% in 4QFY12 and were only 2% higher for the full year.
  • Net NPA ratio increased from 0.38% in FY11 to 0.44% in FY12. Provision coverage continues to be strong at 86%.
  • 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%.

Consolidated performance snapshot
Rs (m) 4QFY11 4QFY12 Change FY11 FY12 Change
Income from operations 14,060 15,824 12.5% 54,531 61,836 13.4%
Interest Expense 5,805 6,558 13.0% 22,928 25,318 10.4%
Net Interest Income 8,255 9,267 12.3% 31,603 36,519 15.6%
Net interest margin (%)^       7.8% 7.5%  
Other Income 72 9 -87.0% 302 40 -86.8%
Other Expense 1,939 2,404 24.0% 8,280 9,226 11.4%
Provisions and contingencies 1,243 1,973 58.7% 5,251 7,757 47.7%
Profit before tax 5,145 4,898 -4.8% 18,375 19,575 6.5%
Tax 1,728 1,612 -6.7% 6,204 6,488 4.6%
Share of profit / (loss) of assoc. - 1   (0) 1  
Profit after tax/ (loss) 3,417 3,288 -3.8% 12,171 13,088 7.5%
Net profit margin (%) 24.3% 20.8%   22.3% 21.2%  
No. of shares (m)         226.3  
Book value per share (Rs)         263.1  
P/BV (x)*         1.9  
* Book value as on 31st, March 2012
^ On Assets under management

What has driven performance in FY12?
  • The country's largest NBFC in terms of asset size, Shriram Transport Finance (STFC), continued to maintain its stronghold over financing used vehicles, however uncertanity in the economic environment led to a slowdown in growth. It fetched lower NIMs of 7.5% in FY12 as against 7.8% in FY11. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 22.8%, however this has declined from the 27.9% seen at the end of FY11. STFC plans to sustain NIMs of 7-8% for the year and sees this remaining in a similar range going forward as well.

  • The RBI has come out with final guidelines on securitization, an activity which the company uses as a source of funding. The biggest impact of the guidelines is on the direct assignment route, which would be more challenging as no credit enhancements are allowed. Disallowing these enhancements would assignments less attractive for banks. Shriram is yet to test the appetite of banks post the revised guidelines. But it is expected that a shift back towards pass through certificates (PTC) issuances via SPVs/Trusts may take place. If this is the case, there may be some impact on the capital adequacy front; however Shriram has an adequate capital buffer for the same.

  • Demand for loans against pre-owned commercial vehicles was weak due to the rising interest rate cycle weak economic environment. STFC managed to see some de-growth in its overall disbursements of 2%. Growth was much slower than what was seen at the end of FY11 (36% growth). Demand for loans against new commercial vehicles (CVs) also took a hit falling by 23% on a YoY basis. The company continued to be conservative, preferring a lower loan-to-value (LTV) ratio for its customers. This also was a factor that slowed growth as the equity customers had to put into the asset increased. The management expects to maintain its 15% AUM growth for FY13, and industrial activity to pick up from the second half of the year.

    New CV disbursements take a hit...
    (Rs m) FY11 % of total FY12 % of total Change
    Truck receivables 197,690   219,019   10.8%
    Disbursements 198,837   194,859   -2.0%
    New CVs 49,598 24.9% 38,396 19.7% -22.6%
    Pre-owned CVs 149,239 75.1% 156,463 80.3% 4.8%

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 79% of its funds from banks in FY12 as against 78% in FY11. 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, the company faced some pressure in terms of interest costs as borrowings were more expensive. However with the RBI's rate cut, Shriram may see some margin accretion on this account.

  • STFC's cost to income ratio remained benign at 25% in FY12 (26% in FY11) due to its operating leverage. The company reduced 622 new employees in the quarter and thus the employee count fell to 15,057 FY12. The headcount was reduced partly on account of a shift to other subsidiaries and partly on account of technological up gradation. The company stands well capitalized with its capital adequacy in excess of 24.3% at the end of FY12 (24.9% in FY11). This will enable it to sustain its loan growth in the medium term. However, the new securitization norms, as mentioned earlier may put some pressure on capital. The new rules are prospective (from now onwards) thus there may not be any immediate strain on the capital front.

  • Provisions increased in FY12 by 48% YoY on account of higher write-offs and other general provisioning. Some accounts were written off in areas exposed to the mining area in the states of Bellary. These write-offs mainly happened in the second and third quarter. NPA levels were higher on account of the weak macro environment.

  • Its two subsidiaries Shriram Automall and Shriram Equipment Finance had a good year. The equipment finance company clocked in disbursements of Rs 16.4 bn and posted a profit of Rs 516.2 m in FY12. Shriram Automall (a platform for second-hand vehicle dealers to transact) was launched in more than 440 of STFC's 502 branches. Its' loss at the net level reduced to Rs 3.8 m versus Rs 139 m loss last year. Four new mini Auto malls were launched during the quarter.

What to expect?
At the current price of Rs 510, the stock is valued at 1.5 times our estimated FY14 adjusted book value. The company has put up a decent show despite the various uncertainties in the macro environment. This includes the RBI's interest rate policy as well as its regulatory stance. Diesel and other fuel prices have seen a hike. The company has also been conservative in fresh lending on account of uncertainties in the environment and has reduced its loan to value ratio to by 5-10% to 65%. It has also mainly lent additional loans to its existing customer base. Consequently, growth has seen some slowdown. Disbursement growth has been below par on account of increased competition in the new CV space and the company's cautious stance on the space. It plans to be more aggressive mainly on the old vehicle front and plans to go into remote rural areas where it currently does not have a presence. STFC expects growth to take off in the second half of FY13 as a number of roads and infra projects will be coming on stream. The company believes that anything above 7% GDP growth will increase CV sales next year.

STFC saw some write-offs on account of the company's exposure to projects in the mining belt on account of adverse regulations, however this has now been adequately provided for. An increase in NPA levels were seen due to the weak macro environment. The company has however been conservative in its provisioning stance and maintains a high coverage ratio (85.9% in FY12). It also wants to focus on yield management, and its older vehicle portfolio in order to maintain its NIMs at around 7%. We continue to maintain our 'BUY' view on the stock.

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