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Shriram Transport: Slowdown doesn’t hurt - Views on News from Equitymaster

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Shriram Transport: Slowdown doesn’t hurt

May 27, 2008

Performance summary
  • Interest income grows 69% YoY in FY08 on the back of 75.4% YoY growth in disbursements. Offtake of pre-owned CV loans grows 101% YoY as demand for new vehicles cools down due to a slowing economy.
  • Ratio of new to old CVs sustained at 28:72 in the company’s advance portfolio

  • Net interest margins drop to 7.8%, from 8.5% in FY07.

  • Other income multiplies 4 fold despite lower fees due to high securitisation income.

  • Return on net worth improves from 19.5% in FY07 to 27.1% in FY08.

  • Gross and net NPA levels reduce from 2.0% and 1.3% in FY07 to 1.6% and 0.9%

  • Board proposes dividend of Rs 4 per share in addition to the interim dividend of Rs 1 given earlier (dividend yield 1.5%).

Rs (m) 4QFY07 4QFY08 Change FY07 FY08 Change
Income from operations 4,297 7,121 65.7% 13,843 23,366 68.8%
Interest Expense 2,454 3,934 60.3% 7,383 12,966 75.6%
Net Interest Income 1,843 3,187 72.9% 6,460 10,400 61.0%
Net interest margin (%)       8.5% 7.8%  
Other Income 74 524 607.0% 312 1,576 405.5%
Other Expense 692 1,272 83.8% 2,215 3,600 62.5%
Provisions and contingencies 534 667 24.9% 1,665 2,317 39.2%
Profit before tax 692 1,773 156.4% 2,892 6,059 109.5%
Tax 208 654 214.4% 988 2,160 118.6%
Profit after tax/ (loss) 484 1,119 131.4% 1,904 3,899 104.8%
Net profit margin (%) 11.3% 15.7%   13.8% 16.7%  
No. of shares (m)       184.1 203.1  
P/BV (x)*         3.3  
* Book value as on 31st March 2008

What has driven performance in FY08?
  • Pre-owned segment – The savior: 30 years of experience in the pre-owned vehicle financing continues to hold Shriram Transport Finance (STFC) in good stead. Although the economic slowdown and rising fuel prices made borrowing for new CVs unviable, the demand for loan for old trucks continued to remain strong.

    STFC surpassed the sector average asset growth, reporting a 75.4% YoY growth in disbursements for FY08. Pre-owned CVs continue to enjoy dominance in the company’s portfolio allocation (72% in FY08). This was also on the back of demand for working capital loans for the pre-owned CVs. Around 15% of the growth in asset book was derived from the partnership with private financers, wherein STFC primarily took the responsibility of arranging for the funds. The institution maintains a loan to value ratio of 65% and intends to get into the old tractor financing and freight bill discounting businesses.

    However, the institution’s inability to re-price the new CVs, led to a substantial drop in the net interest margins (NIMs). Going forward with better credit rating and increased institutional funding the NIMs are expected to remain in the range of 7.5% to 8%.

    Old over new…
    (Rs m) FY07 % of total FY08 % of total Change
    Disbursements 66,083   115,897   75.4%
    New CVs 24,785 37.5% 32,963 28.4% 33.0%
    Pre-owned CVs 41,298 62.5% 82,934 71.6% 100.8%
               
    Assets under management 120,385   195,197   62.1%
    New CVs 38,080 31.6% 57,062 29.2% 49.8%
    Pre-owned CVs 82,305 68.4% 138,135 70.8% 67.8%

  • Other income–Volatile trend: The problem with STFC’s business model is its over-reliance on the vehicle financing industry as most of the other (fee) income are derived from the securitisation of assets that, as a practice, the company has intentionally reduced over the years. Fee to total income stood at 0.2% in FY08 against 0.9% in FY07. Nevertheless, the company has started vending debit cards and mutual fund products through its sales points and these are expected to add to its revenues going forward.

  • Costs benign for the time being: STFC’s cost to income ratio remained benign at 34.3% in FY08 (36.4% in FY07) due to its operating leverage. However, with the company having recruited nearly 5,000 additional employees in FY08, the costs are expected to escalate in the medium term.

  • Capital comfort: In order to fund the incremental growth in its loan book, the company in issued 20 m shares by way of QIP (qualified institutional placement) and 8 m warrants to Shriram Holdings (Madras) convertible into one equity share each at Rs 300 per share. Given this capital raising and assuming the warrants to get converted by FY10, we estimate STFC's adjusted book value to increase from Rs 89 in FY08 to Rs 154 in FY10.

What to expect?
At the current price of Rs 339, the stock is fairly valued at 2.2 times our estimated FY10 adjusted book value. While the distinction of being the country’s largest asset financing NBFC, besides the niche presence in the high-yielding pre-owned CV financing business, earns STFC an edge over its peers in terms of net interest margins and provides substantial cushion in a rising interest rate, we believe that most of the medium term upsides have been factored into the stock price. Having said that, excessive reliance on offtake of commercial vehicles and possibility of delinquencies in the event of uneven agricultural harvest and firm interest rates are our lingering concerns with regard to the company.

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