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Shriram Transport Fin.: Margins take a bow - Views on News from Equitymaster
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Shriram Transport Fin.: Margins take a bow
Oct 29, 2009

Performance summary
  • Interest income grows 21% YoY in 1HFY10 on the back of 15% YoY growth in assets under management (AUM).
  • Net interest margins drop to 6.4%, from 7.1% in 1HFY09; with increased pressure on loan yields.
  • Other income falls by 16% due to lower proportion of income from securitisation.
  • Net profits grow by 20% YoY in 1HFY10 aided by lower operating costs.
  • Net NPA ratio declined from 0.9% in 1HFY09 to 0.8% in 1HFY10.


Rs (m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Income from operations 8,944 10,620 18.7% 17,222 20,768 20.6%
Interest Expense 4,683 5,382 14.9% 8,970 10,910 21.6%
Net Interest Income 4,261 5,238 22.9% 8,252 9,858 19.5%
Net interest margin (%)       6.4% 7.1%  
Other Income 169 96 -43.2% 308 260 -15.6%
Other Expense 1,314 1,150 -12.5% 2,543 2,515 -1.1%
Provisions and contingencies 735 1,121 52.5% 1,430 2,071 44.8%
Profit before tax 2,381 3,063 28.6% 4,587 5,532 20.6%
Tax 723 988 36.7% 1,494 1,813 21.4%
Profit after tax/ (loss) 1,658 2,075 25.2% 3,093 3,719 20.2%
Net profit margin (%) 18.5% 19.5%   18.0% 17.9%  
No. of shares (m)       203.5 211.7  
Book value per share (Rs)         137.0  
P/BV (x)*         2.9  
* Book value as on 30th September 2009

What has driven performance in 2QFY10?
  • Demand for loans against pre-owned commercial vehicles had continued to support the business of Shriram Transport Finance (STFC) even in difficult times. The last quarter infact only acted as a sweetener. With interest rates cooling off, STFC managed to grow its disbursements at an accelerated pace thanks to which the AUMs grew by 14.5% YoY. The growth in disbursements in 1HFY10 was primarily supported by disbursement for pre-owned vehicles. 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. The pressure on yields, nevertheless, dampened the margins which dropped to 6.4%, from 7.1% in 1HFY09. Going forward, STFC is targeting growth in AUM of 25% for this fiscal.

    Balanced growth in assets…
    (Rs m) 1HFY09 % of total 1HFY10 % of total Change
    Truck receivables 180,379   203,567   12.9%
    Disbursement 36,539   67,000   83.4%
    Assets under management 148,360   271,142   82.8%
    New CVs 43,815 29.5% 68,237 25.2% 55.7%
    Pre-owned CVs 104,545 70.5% 202,905 74.8% 94.1%

  • STFC had earlier outlined its plans of getting into the old tractor financing and freight bill discounting businesses. In its results conference call, the management of STFC also threw light on the new business areas such as electronic trading of trucks (e-truck bazaars), auctioning of trucks and sale of refurbished branded trucks that it is looking to grow. The truck trading business in particular earned the company fees of Rs 150 m in 1HFY10 and is expected to be a larger fee generator going forward.

  • 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, 7.1%). The institution derived 86% of its funds from banks in 1HFY10 as against 83% in 1HFY09. 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 cost to income ratio remained benign at 25% in 1HFY10 (30% in 1HFY09) due to its operating leverage. The company recruited 121 additional employees in the last quarter taking the total employee strength to 11,926.

What to expect?
At the current price of Rs 396, the stock is valued at 1.9 times our estimated FY12 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 within our estimated levels. The prospects on the fee income generation business are also enthusing. We retain our positive view on the stock.

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