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Shriram Transport: Applying brake on new CVs - Views on News from Equitymaster
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Shriram Transport: Applying brake on new CVs
Jul 27, 2009

Performance summary
  • Interest income grows 23% YoY in 1QFY10. Assets under management grow by 17% YoY despite low takeoff of new vehicles.
  • Net interest margins drop to 6.4% from 7.4% in 1QFY09 due to higher proportion and cost of borrowing from banks.
  • Other income grows by 30% during the quarter due to higher proportion of income from securitisation.
  • Net profit margin for the quarter falls by 0.9%.
  • Gross and net NPAs at 2.2% and 0.8% respectively at the end of 1QFY10.


Standalone numbers
Rs (m) 1QFY09 1QFY10 Change
Interest income 8,279 10,169 22.8%
Interest Expense 4,287 5,527 28.9%
Net Interest Income 3,992 4,642 16.3%
Net interest margin (%) 7.4% 6.4%  
Other Income 139 181 30.2%
Other Expense 1,229 1,404 14.2%
Provisions and contingencies 695 949 36.5%
Profit before tax 2,207 2,470 11.9%
Tax 771 825 7.0%
Profit after tax/ (loss) 1,436 1,645 14.6%
Net profit margin (%) 17.3% 16.2%  
No. of shares (m)   211.6  
Book value per share (Rs)*   127.5  
P/BV (x)   2.3  
* Book value as on 30th June 2009

What has driven performance in 1QFY10?
  • While poor demand for new trucks and commercial vehicles continued to mar the performance of CV financers, its niche presence in financing pre owned vehicles continued to bail out Shriram Transport Finance (STFC) from the economic meltdown. While STFC has not divulged its disbursement numbers this quarter, the company reported 17% growth in assets under management (AUM) until the end of 1QFY10. The growth in AUM was largely on the back of financing pre owned vehicles that grew by 26% YoY. Loan towards new vehicles on the other hand dropped by 5% YoY. The institution maintains a loan to value ratio of 65% and intends to get into the old tractor financing and freight bill discounting businesses.

    Muted loan take offs
    (Rs m) 1QFY09 % of total 1QFY10 % of total Change
    Assets under management 206,806   242,749   17.4%
    New CVs 57,564 27.8% 54,962 22.6% -4.5%
    Pre owned CVs 149,242 72.2% 187,787 77.4% 25.8%
    Truck receivables 163,050   193,346   18.6%

  • With STFC’s borrowing profile now largely tilted in favour of banks (85% of total borrowing), the rise in cost of funding took a toll on the company’s net interest margins which declined by 1% (NIMs at 6.4% in 1QFY10). The institution marginally increased its proportion of bank borrowing due to the improved liquidity in the banking sector this quarter and derived 85% of its funds from this segment in 1QFY10 as against 83% in 1QFY09. Going forward, with better credit rating and increased institutional funding the NIMs are expected to remain in the range of 7% to 8%.

  • Although as a practice, the company has reduced securitisation over the years, the tight liquidity conditions seems to have induced the company to go in for higher securitisation this quarter. Fee to total income stood at 0.1% in 1QFY10 against 0.4% in 1QFY09. 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.

  • STFC’s cost to income ratio marginally increased from 29% in 1QFY09 to 30% in 1QFY10. Further, with the company having added 3 branches in the last quarter, the costs are expected to escalate in the medium term.

  • Although the gross NPAs increased marginally to 2.2% from 2.1% in 4QFY09, the net NPAs declined to 0.81% from 0.83% during the quarter.

What to expect?
At the current price of Rs 298, the stock is valued at 1.6 times our estimated FY11 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. However, if the company’s asset growth and margins continue to remain muted in the subsequent quarters of FY10 we may have to revise our estimates for the stock. Meanwhile, we retain our positive view on the stock.

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