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Shriram Trans Fin: Provisioning costs dent profits
Nov 1, 2013

Shriram Transport Finance (STFC) declared its results for the second quarter and first half of the financial year 2013-14 (FY14). The institution grew its income from operations by 23% YoY but the profits declined 3% YoY during 2QFY14. The profits for the first half of FY14 grew by 2% YoY. Here is the detailed analysis of the results.

Performance summary
  • Income from operations grew 23% YoY in 2QFY14 with a healthy growth in on-book assets of 28%.
  • Net interest margins moved down to 6.9% in 1HFY14 from higher levels of 7.6% in 1HFY13.
  • While other income shot up substantially, the net income from securitization fell drastically during 2QFY14.
  • Net profit declined by 3% YoY in 2QFY14 due to higher provisioning costs. For 1HFY14, the profits grew by mere 2% YoY.
  • Gross NPAs inched upwards to 3.3% from 2.9% earlier, while the net NPA ratio increased to 0.7% in 2QFY14 from 0.6% in 2QFY13.
  • The cost-income rato was at 24% for the second quarter FY14.


Consolidated financial performance
Rs (m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Income from operations 17,082 21,004 23.0% 33,077 41,297 24.9%
Interest Expense 7,371 10,590 43.7% 13,892 19,959 43.7%
Net Interest Income 9,710 10,414 7.2% 19,185 21,339 11.2%
Net interest margin (%)       7.6% 6.9%  
Other Income 1 32 2384.6% 3 34 975.0%
Other Expense 2,194  2,532 15.4% 4,535 5,376 18.6%
Provisions and contingencies 2,141  2,807 31.1% 4,227 5,657 33.8%
Profit before tax 5,377  5,107 -5.0% 10,427 10,339 -0.8%
Tax 1,751  1,588 -9.3% 3,379 3,157 -6.6%
Profit after tax/ (loss) 3,626  3,519 -3.0% 7,047 7,182 1.9%
Net profit margin (%) 21.2% 16.8%   21.3% 17.4%  
No. of shares (m)         226.9  
Book value per share (Rs)         344.6  
P/BV (x)*          1.7  
* Book value as on 30th September 2013

What has driven performance in 2QFY14?
  • Shriram Transport continues to bank on rural presence and its niche segment of used vehicles. The demand from semi-urban and rural markets continues to remain robust. With strong geographical reach, the company's branch network comprises of 620 branch offices and 515 rural centres.

  • The demand for Used CVs continues to remain steady. The Used CV segment reported 30.5% YoY growth for the second quarter. However, the new vehicles segment has remained laggard and reported a de-growth of 11.9% for the quarter. Overall the assets under management (AUMs) reported decent 21.4% YoY growth during 2QFY14; largely driven by the Used CV segment. The Used CVs continue to grow strong and reported a sturdy YoY growth of 30.5% during 2QFY14.

    New CVs remained laggards...
    (Rs m) 2QFY13 % of total 2QFY14 % of total Change
    Assets under management  440,384   534,712   21.4%
    New CVs 94,132 21.4% 82,965 15.5% -11.9%
    Pre-owned CVs  346,252 78.6% 451,747 84.5% 30.5%

  • Despite decent show on AUM front, the core income performance and the profitability of STFC. The higher interest costs for the quarter took a toll on the earnings performance of STFC. The interest costs stood much higher and have registered 43.7% YoY spike during 2QFY14 and the yields for the quarter declined. This was despite STFC having increased their lending rates during the month of August. Moreover, excess borrowings also added to the pressures. Consequently, 2QFY14 also witnessed sharp contraction in margins that dropped to 6.7% levels from higher levels of 7.6% a year ago. As a result, the net inetrest income suffered and reported mere 7.2% YoY growth for the quarter. The NII decelerated for the second quarter in succession since the beginning of FY14.

  • The operating costs also stood on the higher side for the company with the ongoing branch expansion activity and the one-off expenses pertaining to an incentive component during the second quarter. The operating expenses reported a 15.4% increase YoY during 2QFY14.

  • The asset quality for STFC has further deteriorated with Gross NPAs inching upwards to 3.3% levels in 2QFY14 from 2.9% in 1QFY14. The net NPAs too are inching towards 1% mark and were recorded at 0.7% in 2QFY14 up from 0.6% a year ago. Elevated NPAs warranted higher provisions and hence the provisioning costs went up by 31.1% during the second quarter of FY14 thus impacting the profitability of the company.

  • At the bottom-line level, consolidated net profits reported a de-growth of 3% YoY primarily on account of higher interest costs and higher provisions. The profits for the first half of FY14 also remained muted with mere 1.9% growth YoY.

  • The cost-income ratio at 24% for the quarter remained more or less stable.

  • The RoEs for the company have dipped and were reported at 21.1% during 2QFY14 down from 25.9% a year ago.

What to expect?

At the current price of Rs 574, the stock is valued at 1.1 times our estimated FY16 adjusted book value.

Owing to the sluggish macro-economic environment, the asset quality threat continues to persist for STFC. Certain geographies such Andhra Pradesh continues to throw up challenges. This will ensure higher provisioning costs. Additionally, given the sluggish business environment, maintaining margins at 7% levels continue to pose a challenge for STFC. Higher provisioning coupled with lower margins is expected to impact the earnings performance of STFC going forward. That said, good monsoons and the incumbent festive season are expected to alleviate concerns in second half of FY14. Moreover, re-alignment of freight rates with fuel prices will also help in bringing stability to the pricing of assets.

The company hopes to pass on higher costs to the customers and reducing the interest cost burden. Also, the lag effect of the increased lending rate in the month of August may help boost margins in the second half. Furthermore, the company has identified another 3500 rural centres as the potential business segments that may help boost the disbursements going forward. Against this backdrop, STFC is hopeful of recording 17-18% AUM growth for the full year FY14.

While the near term stress stand imminent for STFC owing to macro uncertainties, on a longer-term horizon the company's growth prospects look promising. Despite factoring in higher NPAs at 3% levels for the next couple of years, the company's return ratios and earning potential offer reasonable upsides. With improving economic scenario, we expect STFC's performance to get better and hence we reiterate BUY recommendation on the stock. 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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