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Shriram Trans Fin: Another lackluster quarter - Views on News from Equitymaster

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Shriram Trans Fin: Another lackluster quarter
Oct 22, 2014

Shriram Transport Finance (STFC) declared its results for the second quarter (2QFY15) and first half (1HFY15) of the financial year 2015. The institution grew its net interest income by mere 5.4% YoY; however, the profits have declined by 11.9% YoY in 2QFY15. For 1HFY15, the consolidated profits for the company dipped by 13.3% YoY. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grows by modest 7.6% YoY in 2QFY15 on the back of 3.3% YoY growth in assets under management during the quarter. For 1HFY15, the top-line moved up by mere 6.8% YoY.
  • Net interest margins moved down to 6.9% from 6.6% in 1HFY15.
  • Other income declines by staggering 72.7% YoY. Net income from securitization fell steeply during 2QFY15.
  • Net profit declines by 11.9% YoY in 2QFY15 due to poor income performance and higher credit costs. The profits for first half of FY15 also fell by 13.3% YoY on account of discouraging income performance.
  • Gross NPAs inched upwards to 3.74% from 3.27% previous year, while the net NPA ratio increased to 0.80% in 2QFY15 from 0.67% in 2QFY14.

Consolidated Financial performance snapshot
Rs (m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Income from operations  21,004  22,604 7.6% 41,297 44,100 6.8%
Interest Expense 10,590 11,630 9.8% 19,959 22,157 11.0%
Net Interest Income 10,414 10,974 5.4% 21,339 21,942 2.8%
Net interest margin (%)       6.9% 6.6%  
Other Income 32 9 -72.7% 34 11 -68.0%
Other Expense 2,532 2,961 16.9% 5,376 5,891 9.6%
Provisions and contingencies 2,807 3,394 20.9% 5,657 6,909 22.1%
Profit before tax 5,107 4,628 -9.4% 10,339 9,153 -11.5%
Tax 1,588 1,527 -3.8% 3,157 2,924 -7.4%
Profit after tax/ (loss) 3,519 3,100 -11.9% 7,182 6,229 -13.3%
Net profit margin (%) 16.8% 13.7%   17.4% 14.1%  
No. of shares (m)         226.9  
Book value per share (Rs)       344.6 389.4  
P/BV (x)*         2.3  
* Book value as the end half year end 30th September 2014

What has driven performance in 2QFY15?
  • The company's fundamentals have been impacted by the weak industrial output, spike in diesel prices, poor infrastructure activity and mining ban. With slump in commercial vehicle sales and contraction in demand for truck loans, the loan growth for the company have also taken a hit. Moreover, given the cyclical nature of the business, the asset quality blips stand inevitable.

  • STFC has witnessed weak earnings performance for the second consecutive in a row during FY15. Higher credit costs and poor income performance has weighed down the profitability of the company. Asset quality pressures continue to dent the earnings performance of Shriram Transport Finance. The profits for the first half were largely down due to poor other income performance, sluggish top-line and higher credit costs.

  • The business performance has remained muted with assets under management (AUM) growing by sluggish 3.3% YoY during the quarter. The new CV segment continues to languish, declining 37% YoY. While the Used CV segment has reported a tepid 9.9% YoY growth, indicating CV financing business is yet to pick up.

    Sluggish AUM growth; New CV segment continues to languish
    (Rs m) 2QFY14 % of total 2QFY15 % of total Change
    Assets under management 537,815   555,467   3.3%
    New CVs 82,965 15.4% 52,232 9.4% -37.0%
    Pre-owned CVs 451,747 84.0% 496,597 89.4% 9.9%

  • Subdued business growth has ensured lower core income performance for STFC. While the disbursements have grown by 13% YoY, the AUMs have reported a sluggish growth of 3.3% YoY during 2QFY15. Therefore, the net interest income has remained tepid at Rs 10.97 bn during 2QFY15. The securitization income has tumbled too during the quarter. While the yields have improved, the margins' fall was contained at around 6.6% levels (6.7% in 2QFY14). While the margin pressures are here to stay, the management would continue to strive back to 7.0% levels.

  • STFC's borrowing profile continued to remain tilted towards banks with 81% of funding coming from banks during 2QFY15.

  • Other expenses have spiked by 16.9% YoY during 2QFY15.

  • Gross NPAs inched upwards to 3.74% from 3.27% a year ago, while the net NPA ratio increased to 0.80% in 2QFY15 from 0.67% in 2QFY14. Sequentially the gross NPA movement has remained flat. The provision coverage ratio stood at healthy 79% during the quarter. .

  • RoEs for STFC have dipped to 13.9% levels during the 2QFY15, down from higher levels of 16.9% in 2QFY14.
What to expect?
At the current price of Rs 899, the stock is valued at 1.6 times FY17 estimated book value. The second quarter of the current financial year for STFC was characterized by poor core income performance and earnings pressure. Thus, overall the 1HFY15 stood rather disappointing for the company given the fact that clarity of economic revival, uncertainty in monsoons and prolonged resolution of mining activity issues failed to support the business growth. As mentioned earlier in our previous updates, the business growth does not look encouraging for the company and that is quite vividly reflected in the margins and return ratios of the company. We also highlighted the fact that the consolidated group earnings and asset quality are expected to suffer. We, therefore, had also recommended investors to Sell the stock in June 2014. We maintain our cautious stance on the company. Please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 4-5% of your portfolio.

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