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Shriram Trans Fin: Asset securitisation kicker

Jul 23, 2010

Shriram Transport Finance (STFC) declared its 1QFY11 results. The institution grew its interest income and profits at 22% and 76% YoY respectively.

Performance summary
  • Interest income grows 22% YoY in 1QFY10 with a healthy growth in assets under management of 25%.
  • Net interest margins improve to 8.3%, from 6.6% 1QFY10; with lesser pressure on loan yields. Incremental lending skewed towards pre-owned vehicles.
  • Other income grows by 162% due to higher proportion of income from securitisation.
  • Net profits grow by 75% YoY in FY10 aided by low interest expenses, and a jump in other income.
  • Net NPA ratio declined from 0.7% in FY10 to 0.4% in 1QFY11.

Rs (m) 1QFY10 1QFY11 Change
Income from operations 10,069 12,269 21.9%
Interest Expense 5,527 5,568 0.7%
Net Interest Income 4,541 6,701 47.6%
Net interest margin (%) 6.6% 8.3%  
Other Income 229 600 162.2%
Other Expense 1,366 1,675 22.7%
Provisions and contingencies 935 1,281 37.0%
Profit before tax 2,469 4,345 76.0%
Tax 825 1,456 76.5%
Profit after tax/ (loss) 1,644 2,889 75.7%
Net profit margin (%) 16.3% 23.6%  
No. of shares (m) 118.2 132.1  
Book value per share (Rs)   183.2  
* Book value as on 30th June 2010

What has driven performance in 1QFY11?
  • 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 much higher NIMs of 8.3% in 1QFY11 as against 6.6% in the previous quarter last year. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 29% and sees its assets growing at annual rate of 25% over the next 3 years without equity dilution. During the quarter the company has raised Rs 5 bn by way of public issue of redeemable non-convertible debentures.

    Demand for loans against pre-owned commercial vehicles has continued to support STFC’s business even in difficult times. With interest rates cooling off, STFC managed to grow its disbursements at an accelerated pace of 22%. However, with securitisation of most of the incremental and long duration assets the growth in recievables was pretty much flat. The growth in disbursements in 1QFY11 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 improvement of yields as well as an increase in spreads contributed to the increase in margins from 6.6% to 8.3%.

    Balanced growth in assets...
    (Rs m) 1QFY10 % of total 1QFY11 % of total Change
    Truck receivables 193,346   203,228   5.1%
    Disbursements 32,596   39,736   21.9%
    New CVs 6,217 19.1% 6,405 16.1% 3.0%
    Pre-owned CVs 26,378 80.9% 33,331 83.9% 26.4%

  • Presently, the average age of trucks is 10-11 years in India, compared to 5-6 years in developed countries. The company has also recently launched two new initiatives in order to extend finance for truck owners to replace their trucks. This includes Shriram Newlook which is a platform where old trucks from the market are refurbished and sold under this brand name. The company expects to sell 1,500 vehicles in FY11 through this platform. Another initiative launched was Shriram One Stop, which is a computerised touch screen kiosk which will be a virtual truck bazaar, will provide information about used commercial vehicles available for sale. The company plans to install 500 Onestop service in 500 locations, which will be a technical platform for the transactions. Currently customers can transact with a registration fee Rs 100. From the next quarter, STFC will be charging one per cent of the selling cost, thus boosting its non fund revenue stream. This quarter it realised Rs 60.6 m through this fee income. Its target for FY11 is Rs 500 m.

  • With STFC’s borrowing profile is largely tilted in favour of banks, the institution derived 83% of its funds from banks in 1QFY11 as against 85% in 1QFY10. 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 may face some pressure in terms of interest costs as borrowing may get more expensive. Going forward however, due to better credit rating and increased institutional funding the NIMs are expected to sustain in the current range of 7.0% to 8%.

  • STFC’s cost to income ratio remained benign at 23% in 1QFY11 (29% in 1QFY10) due to its operating leverage. The company added 437 new employees in the quarter and thus employee costs rose sharply by 54% YoY in 1QFY11.

What to expect?
At the current price of Rs 632, the stock is valued at 2.2 times our estimated FY13 adjusted book value. The company has been conservative in its provisioning as well as its policy of amortizing securitisation gains of the tenure of the loan, rather than an upfront gain. In the results conference call, the management stated that they will not be facing much pressure due to the new base rate regime, as rates will be now be linked to the base rate instead of the PLR (prime lending rate). They will however face some pressure if the interest rates move northwards. The company has, however, tried to minimise interest rate risks, as their portfolio is now 76% on fixed rates and 24% on floating , which is a change from a 50-50% mix in the past. STFCexpects its NIMs to remain within the 7-8% range.

STFC is expecting a 20-25% growth in advances and expects to retain its market share of 20-25% in the pre-owned truck space in FY11. We had recently recommended the company and we maintain our view on the stock. (Research Pro subscribers can view latest updates here).

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