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Shriram Trans Fin.: Rate hikes put brakes on profit growth - Views on News from Equitymaster
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  • Jul 28, 2011 - Shriram Trans Fin.: Rate hikes put brakes on profit growth

Shriram Trans Fin.: Rate hikes put brakes on profit growth
Jul 28, 2011

Shriram Transport Finance (STFC) declared its results for the first quarter of the financial year 2011-12 (1QFY12) results. The institution grew its net interest income and profits at 21% and 20% YoY respectively.

Performance summary
  • Net Interest income grows 21% YoY in 1QFY12 with a growth in assets under management of 22%.
  • Net interest margins (on assets under management) improve marginally to 7.91%, from 7.85% in 1QFY11. However, they have seen some pressure over the past three months; they were touching 8% at the end of FY11.
  • Other income sees a growth of 22%.
  • Net profits grow by 20% YoY in 1QFY12 aided by low interest and other expenses.
  • Net NPA ratio increases to 0.5% in 1QFY12 from 0.4% at the end of 1QFY11.



Financial performance: A snapshot
Rs (m) 1QFY11 1QFY12 Change
Income from operations 12,269 13,921 13.5%
Interest Expense 5,672 5,917 4.3%
Net Interest Income 6,597 8,003 21.3%
Net interest margin (%) 7.9% 7.9%  
Other Income 600 734 22.3%
Other Expense 1,571 1,792 14.0%
Provisions and contingencies 1,281 1,745 36.3%
Profit before tax 4,345 5,200 19.7%
Tax 1,456 1,727 18.6%
Profit after tax/ (loss) 2,889 3,473 20.2%
Net profit margin (%) 23.6% 24.9%  
No. of shares (m)   226.2  
Book value per share (Rs)   230.6  
P/BV (x)*   2.9  
* Book value as on 30th June 2011

What has driven performance in 1QFY12?
  • 1The country's largest NBFC in terms of asset size, Shriram Transport Finance continued to maintain its stronghold over financing used vehicles. However, it faced some pressure on account of the rising interest rate environment. Its NIMs improved only marginally but this was at least 3-4% higher than that of the best performing banks. A reason why NIMs remained stable was because no additional borrowings were taken during the quarter. A mix of its fixed rate liabilities and liquidity through securitisation helped maintain its margins this qurter. It plans to maintain its NIMs between 7.6-8% for the year. The institution sustained robust return on equity of 27%.

  • Demand for loans against new commercial vehicles (CVs) continued to support STFC's business even in a rising interest rate cycle. STFC managed to grow its overall disbursements by 20%. However, growth was slower than what was seen at the end of FY11 (36% growth). Disbursements growth saw a fillup from the new CV space. New CV disbursement increased at a robust pace of 68% during 1QFY12. Due to the increase in diesel prices, there has been additional demand for new vehicles with superior technology. First time customers also tend to prefer new vehicles as a start before graduating to bigger vehicles. Also with the hub and spoke model, smaller vehicles are preffered for use within cities. The company mantains its AUM growth target of 15%, however we have been slightly conservative in our estimates.

  • With securitisation of most of the incremental and long duration assets, the growth in truck receivables came in lower at 9%. 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.

    Balanced growth in assets...
    (Rs m) 1QFY11 % of total 1QFY12 % of total Change
    Truck receivables 203,173   221,274   8.9%
    Disbursements 39,736   47,842   20.4%
    New CVs 6,405 16.1% 10,752 22.5% 67.9%
    Pre-owned CVs 33,331 83.9% 37,090 77.5% 11.3%

  • With STFC's borrowing profile largely tilted in favour of banks, the institution derived 76% of its funds from banks in 1QFY12 as against 83% in 1QFY11. 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 has consciously decided to reduce its dependence on bank borrowings. The company also securitizes its assets, and is thus able to raise cheaper funds.

  • STFC's cost to income ratio remained benign at 21% in 1QFY12 (22% in 1QFY11) due to its operating leverage.

What to expect?
At the current price of Rs 666, the stock is valued at 1.9 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 also seen a hike. Consequently, growth has seen some slowdown, which we have factored into our estimates for the year. However, the company has still managed to see significant growth in the new CV space, as customers have been demanding newer, more fuel efficient, and smaller vehicles. But this demand may wane due to the aggressive rate hikes by the central bank. There has been a marginal slippage in asset quality both on the gross and net level. The company believes that this was due to a seasonal effect. The company has however been conservative in its provisioning stance and maintains a high coverage ratio. Due to the higher interest rate cycle, we have also assumed slightly deteriorating asset quality for the year. Income from securitization will also pick up later on in the year, as banks need to meet their year-end priority sector lending targets. In light of the company's decent performance even in a tough environment, we continue to maintain our ‘HOLD' view on the company.

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