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Shriram Trans Fin: Borrowing costs hurt margins - Views on News from Equitymaster
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Shriram Trans Fin: Borrowing costs hurt margins
Nov 2, 2012

Shriram Transport Finance (STFC) declared its results for the second quarter of the financial year 2012-13. The institution grew its interest income and profits at 6% and 2% YoY respectively.

Performance summary
  • Interest income grows 6% YoY in 2QFY13 with a healthy growth in assets under management of 18%.
  • Net interest margins fall to 7.6%, from 7.9% 1HFY12.
  • Other income increased significantly in 2QFY13, for the half it increased almost four times.
  • Net profits remain flat, growing by only 2% YoY in 2QFY13 on account of higher provisioning and benign growth in net interest income.
  • Gross NPAs increased to 2.89% in 1HFY13 from 2.69% earlier, while the net NPA ratio increased to 0.61% in 1HFY13 from 0.41% earlier.
  • The company also declared an interim dividend of Rs 3 per share.

Consolidated financial performance
Rs (m) 2QFY12 2QFY13 Change 1HFY12 1HFY13 Change
Income from operations 14,595 15,932 9.2% 29,251 30,968 5.9%
Interest Expense 6,198 6,902 11.3% 11,931 13,110 9.9%
Net Interest Income 8,396 9,030 7.5% 17,320 17,857 3.1%
Net interest margin (%)       7.9% 7.6%  
Other Income 12 55 358.0% 32 117 262.8%
Other Expense 1,875 1,904 1.6% 3,834 3,959 3.3%
Provisions and contingencies 2,079 2,167 4.3% 3,865 4,241 9.7%
Profit before tax 4,454 5,013 12.5% 9,654 9,774 1.2%
Tax 1,460 1,638 12.1% 3,187 3,180 -0.2%
Profit after tax/ (loss) 2,994 3,376 12.7% 6,467 6,594 2.0%
Net profit margin (%) 20.5% 21.2%   22.1% 21.3%  
No. of shares (m)         226.4  
Book value per share (Rs)         291.9  
P/BV (x)*         2.2  
* Book value as on 30th September 2012

What has driven performance in 1HFY13?
  • The country's largest NBFC in terms of asset size Shriram Transport Finance (STFC) continued to maintain its stronghold over financing used vehicles, however uncertanity in the economic environment led to a slowdown in growth. It fetched slightly lower NIMs of 7.6% in 1HFY13 as against 7.9% in 1HFY12. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 20.9%, however this declined from the 24.7% seen at the end of 1HFY12. STFC plans to sustain NIMs of 7-8% for the year. The company has however not really done much securitisation this year, however it expects this to pick up over the next two quarters.

    Disbursement growth slows...
    (Rs m) 1HFY12 % of total 1HFY13 % of total Change
    Truck receivables 242,091   293,247   21.1%
    Disbursements 95,786   115,365   20.4%
    New CVs 20,865 21.8% 21,208 18.4.8% 1.6%
    Pre-owned CVs 74,921 78.2% 94,157 81.6% 25.7%

  • Demand for loans against new commercial vehicles (CVs) slowed in the first half on account of the rising interest rate cycle and falling IIP (Index of Industrial Production) growth. STFC managed to grow its overall disbursements by 20% in 1HFY13. New CV disbursement increased by only 1% during 1HFY13, with customers preferring smaller vehicles. Preowned vehicle growth however was strong with the company seeing a 26% YoY growth in these disbursements. The company has pushed into rural centers and its automall business is also leading to more leads. The company has maintained its AUM growth target of 15%, for the year which it expects to comfortably achieve.

  • While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 78% of its funds from banks in 1HFY13 as against 79% in 1HFY12. Last year, the fall in cost of bank funding helped the company pass on the lower rates to customers. However, with the base rate regime now in place, the company is facing some pressure in terms of interest costs as borrowing may get more expensive. It also raised Rs 6 bn in secured non-convertible debentures (NCDs) earlier this quarter, and the expenses on due to this issuance led to higher interest costs for the quarter.

  • STFC's cost to income ratio remained benign at 22% in 1HFY13 due to its strong operating leverage. The company stands well capitalized with its capital adequacy of 20.5% at the end of 1HFY13. This will enable it to sustain its loan growth in the medium term, and it does not foresee a requirement for additional capital.

  • Asset quality was maintained at similar levels even in a tough environment. Gross NPA increased to 2.89% in 1HFY13 from 2.69% earlier. However it came down versus the 3.06% levels seen at the end of March '12. Net NPAs increased to 0.61% in 1HFY13 from 0.41% earlier.

What to expect?
At the current price of Rs 627.8, the stock is valued at 1.5 times our estimated FY15 adjusted book value. The company has put up a decent show despite the various uncertainties in the macro environment. It has also renewed its focus on its niche of pre-owned vehicles and is concentrating on the rural market, which continues to be robust. It also wants to focus on yield management, and its older vehicle portfolio in order to maintain its NIMs at around 7-8% range. The company has also been conservative in fresh lending on account of uncertainties in the environment and has reduced its loan to value ratio to by 5-10% to 65%. STFC expects growth to take off in the second half of FY13 as a number of roads and infra projects will be coming on stream and expects AUM growth of 15% for the year. Securitization guidelines are also in its favour, and it expects the same to pick up towards the end of the year. STFC is the biggest supplier of such securitized priority sector lending (PSL) paper, and for foreign banks as well as private sector banks to meet their PSL targets, they usually turn to players like Shriram. We continue to maintain our 'BUY' view on the stock from a 2-3 year perspective.

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