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Shriram Transport Fin.: In steady gear - Views on News from Equitymaster
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Shriram Transport Fin.: In steady gear
Jul 31, 2008

Performance summary
  • Interest income grows 74% YoY in 1QFY09 on the back of 55% YoY growth in assets under management.

  • Net interest margins drop to 7.4%, from 8.1% in 1QFY08 emphasising pressure on borrowing costs from banks.

  • Other income grows by 62% backed by a higher proportion of fees.

  • Net profit margin improves by 1.6% YoY. Lower tax rates offset marginally higher operating costs.

  • Net NPAs drop from 2.1% in 1QFY08 to 1.4% in 1QFY09.



Rs (m) 1QFY08 1QFY09 Change
Income from operations 4,718 8,216 74.1%
Interest Expense 2,324 4,287 84.5%
Net Interest Income 2,394 3,929 64.1%
Net interest margin (%) 8.1% 7.4%  
Other Income 86 139 61.6%
Other Expense 729 1,220 67.4%
Provisions and contingencies 569 632 11.1%
Profit before tax 1,182 2,216 87.5%
Tax 433 781 80.4%
Profit after tax/ (loss) 749 1,435 91.6%
Net profit margin (%) 15.9% 17.5%  
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 1QFY09?
  • A firm trend in interest rates although impacting the demand for new commercial vehicles, did not hurt the demand for pre-owned vehicles and thus helped STFC sustain a consistent growth in its assets under management (AUM). STFC reported 40.4% YoY growth in disbursements in 1QFY09, primarily supported by 54.9% YoY growth in disbursement for pre-owned vehicles. Pre-owned CVs continue to enjoy dominance in the company’s portfolio allocation (79% in 1QFY09) due to the demand for working capital loans. The institution maintains a loan to value ratio of 65% and intends to get into the old tractor financing and freight bill discounting businesses.

    Old is gold…
    (Rs m) 1QFY08 % of total 1QFY09 % of total Change
    Disbursements 20,116   28,250   40.4%
    New CVs 5,648 28.1% 5,837 20.7% 3.3%
    Pre-owned CVs 14,468 71.9% 22,413 79.3% 54.9%
    Assets under management 133,147   206,782   55.3%
    New CVs 40,866 30.7% 57,564 27.8% 40.9%
    Pre-owned CVs 92,281 69.3% 149,218 72.2% 61.7%

  • The institution’s inability to re-price the new CVs and rise in the cost of funds borrowed from banks led to a substantial drop in the net interest margins (NIMs, dropped by 0.7% in the last 12 months to 7.4% in 1QFY09). The institution derived 83% of its funds from banks in 1QFY08 as against 79% in 1QFY09. Going forward with better credit rating and increased institutional funding the NIMs are expected to remain in the range of 7.5% to 8%.

  • STFC’s business model continues to over-rely on the vehicle financing industry as most of the other (fee) incomes 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 0.4% in 1QFY09 against 2.3% in 1QFY08. 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 remained benign at 35.2% in 1QFY09 (36.6% in 1QFY08) due to its operating leverage. However, with the company having recruited nearly 1,000 additional employees in the last quarter, the costs are expected to escalate in the medium term.

What to expect?
At the current price of Rs 292, the stock is valued at 1.5 times our estimated FY11 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, the pressure on net interest margins may hurt the company’s profitability in the near term. Having said that, the possibility of delinquencies in the event of uneven agricultural harvest and rise in fuel costs are our lingering concerns with regard to the company.

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