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Shriram Trans Fin: Slippage concerns weigh on profits - Views on News from Equitymaster

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  • May 14, 2013 - Shriram Trans Fin: Slippage concerns weigh on profits

Shriram Trans Fin: Slippage concerns weigh on profits
May 14, 2013

Shriram Transport Finance (STFC) declared its results for the fourth quarter and financial year 2012-13 (FY13). The institution grew its income from operations and profits by 14% YoY and 12% YoY respectively in FY13. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grows 14% YoY in FY13 with a healthy growth in assets under management of 23%. Truck receivables went up by 42% YoY.
  • Net interest margins remain stable at 7.5%.
  • Other income falls marginally by 3.3% for the full year. Net income from securitization falls 10% YoY in FY13.
  • Net profit grows by 11.8% YoY in FY13 despite higher provisioning costs.
  • Gross NPAs increased to 3.2% from 3.0% earlier, while the net NPA ratio increased to 0.8% in FY13 from 0.4% in FY12.
  • Board declared dividend of Rs 4 per share (after interim dividend of Rs 3 per share) for FY13 (dividend yield 0.9%).

Consolidated financial performance
Rs (m) 4QFY12 4QFY13 Change FY12 FY13 Change
Income from operations 15,748 19,062 21.0% 61,754 70,121 13.5%
Interest Expense 6,557 8,719 33.0% 25,317 30,537 20.6%
Net Interest Income 9,191 10,343 12.5% 36,437 39,584 8.6%
Net interest margin (%)       7.5% 7.5%  
Other Income 9 18 92.6% 40 39 -3.3%
Other Expense 2,331 2,387 2.4% 9,145 9,273 1.4%
Provisions and contingencies 1,971 2,325 18.0% 7,757 8,722 12.4%
Profit before tax 4,898 5,649 15.3% 19,575 21,628 10.5%
Tax 1,611 1,812 12.5% 6,487 6,994 7.8%
Profit after tax/ (loss) 3,287 3,837 16.7% 13,088 14,634 11.8%
Net profit margin (%) 20.9% 20.1%   21.2% 20.9%  
No. of shares (m)         226.8  
Book value per share (Rs)         315.6  
P/BV (x)*         2.4  
* Book value as on 31st March 2013

What has driven performance in FY13?
  • At over 80% of totral assets under management, financing used vehicles, remained the mainstay and key growth driver for STFC in FY13. While the NIMs remained stable at 7.5% in FY13, it was nevertheless at least 3% higher than that of the best performing banks. STFC is targeting to sustain NIMs in excess of of 7% for the year and sees this remaining in a similar range going forward as well. The bank has done a little over Rs 87 bn of securitisation in FY13 (up 5.2% YoY). Demand for the same has still not reduced as banks, need to maintain priority sector lending guidelines. As per the latest RBI guidelines, foreign banks with more than 20 branches (Standard Chartered, HSBC, and Citi) need to be treated on par with domestic lenders. Thus, their priority sector lening norms have been increased to 40% of annual lending from 32% earlier.

  • Demand for loans against new commercial vehicles (CVs) slowed down in FY13 on account of the rising interest rate cycle and falling IIP (Index of Industrial Production) growth. The company has not divulged the growth rate in disbursement to new and pre owned CV segments..

    Loan growth picks up...
    (Rs m) FY12 % of total FY13 % of total Change
    Truck receivables 219,019   311,226   42.1%
    Assets under management 401,281   493,548   23.0%
    New CVs 90,857 22.6% 95,269 19.3% 4.9%
    Pre-owned CVs 310,424 77.4% 398,279 80.7% 28.3%

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 81.6% of its funds from banks in FY13 as against 78.9% in FY12. With the RBI's policy rate cut, and an expected fall in bank lending rates it may see some margin accretion on this account.

  • STFC's cost to income ratio remained benign at 23% in FY13 due to its strong operating leverage. The company added 1,121 employees in the fourth quarter taking the total number of employees to 16,178. The company stands well capitalized with its capital adequacy at 17.8% at the end of FY13. 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 for bad debts increased by 12.4% YoY in FY13. Asset quality was maintained at similar levels even in a tough environment. Gross NPA increased to 3.2% in FY13 from 3% earlier. Also, net NPAs increased to 0.8% in FY13 from 0.4% in FY12. The provision coverage ratio stood at 44.2% in FY13 as against 69.5% in FY12.

  • STFC's return on equity, although healthy at 20.5% in FY13, was lower as compared to that in FY12 (22.8%).

What to expect?
At the current price of Rs 750, the stock is valued at 1.7 times our estimated FY15 adjusted book value. STFC expects conservative AUM growth for FY14 and expects margins to remain stable if not improve. Securitization guidelines are also in its favour, and it expects the same to pick up in FY14. STFC is the biggest supplier of such securitized priority sector lending (PSL) paper, and for foreign banks as well as private sector banks to meet their PSL targets, they usually turn to players like STFC. The institution's subsidiaries have also been performing satisfactorily. The slippage in asset quality and lower provision coverage ratio is however a lingering concern. We reiterate our Hold view on the stock. Please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 4-5% of your portfolio.

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