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Shriram Transport Fin.: No sign of slowdown - Views on News from Equitymaster
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Shriram Transport Fin.: No sign of slowdown
Oct 24, 2008

Performance summary
  • Interest income grows 65% YoY in 1HFY09 on the back of 37% growth in disbursements.
  • Net interest margins drop to 7.6%, from 8.0% in 1HFY08; emphasising pressure on borrowing costs from banks.
  • Other income grows by 71% backed by a higher proportion of income from securitisation.
  • Net profit margin improves by 1.9% YoY. Lower tax rates offset marginally higher operating expenses.
  • Net NPA ratio declined from 1.0% in 1HFY08 to 0.9% in 1HFY09.


Rs (m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Income from operations 5,626 8,889 58.0% 10,345 17,105 65.3%
Interest Expense 2,981 4,683 57.1% 5,304 8,970 69.1%
Net Interest Income 2,645 4,206 59.0% 5,041 8,135 61.4%
Net interest margin (%) 8.0% 7.6%
Other Income 94 169 79.8% 180 308 71.1%
Other Expense 731 1,314 79.8% 1,460 2,544 74.2%
Provisions and contingencies 575 680 18.3% 1,144 1,312 14.7%
Profit before tax 1,433 2,381 66.2% 2,617 4,587 75.3%
Tax 511 723 41.5% 943 1,494 58.4%
Profit after tax/ (loss) 922 1,658 79.8% 1,674 3,093 84.8%
Net profit margin (%) 16.4% 18.7% 16.2% 18.1%
No. of shares (m) 191.1 203.5
Book value per share (Rs) 105.0
P/BV (x)* 1.9
* Book value as on 31st March 2008

What has driven performance in 2QFY09?
  • Neither the economic meltdown, nor the firm trend in interest rates managed to have an impact on the demand for pre-owned commercial vehicles that continued to support STFC’s balance sheet growth this quarter. STFC reported 36.5% YoY growth in disbursements in 1HFY09, primarily supported by 44.1% YoY growth in disbursement for pre-owned vehicles. The company’s assets under management (AUM) in terms of new and pre-owned vehicles are currently well balanced. The institution maintains a loan to value ratio of 65% and intends to get into the old tractor financing and freight bill discounting businesses.

    Balanced growth in assets…
    (Rs m) 1HFY08 % of total 1QFY09 % of total Change
    Disbursements 26,761 36,539 36.5%
    New CVs 6,495 24.3% 7,328 20.1% 12.8%
    Pre-owned CVs 20,266 75.7% 29,211 79.9% 44.1%
    Assets under management 148,360 225,501 52.0%
    New CVs 43,815 29.5% 68,237 30.3% 55.7%
    Pre-owned CVs 104,545 70.5% 157,264 69.7% 50.4%

  • With STFC’s borrowing profile now largely tilted in favour of banks, the rise in cost of funding took a toll on the company’s net interest margins (NIMs, 7.6%). The same, however, continue to remain well above our estimate of 6.9% for the full year FY09. The institution derived 83% of its funds from banks in 1HFY09 as against 82% in 1HFY08. 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. 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 0.2% in 1HFY09 against 0.8% in 1HFY08. 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 32.6% in 1HFY09 (36.0% in 1HFY08) due to its operating leverage. However, with the company having recruited nearly 1,893 additional employees and added 12 branches in the last quarter, the costs are expected to escalate in the medium term.

What to expect?
At the current price of Rs 207, the stock is very attractively valued at 1.1 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. We also derive comfort from the fact that the company’s asset growth as well as margins so far have been well above our estimated levels. We retain our view on the stock.

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