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Shriram Transport: ‘Pre-owned’ saved the day

Nov 5, 2007

Performance summary
  • Income from operations grows 71% YoY on the back of higher lending rates and 56% YoY growth in disbursements.

  • Growth in disbursement of new CVs mellows to 15% YoY in 1HFY08 against over 100% YoY growth in FY07

  • Net interest margins drop to 8.4%, from 9.0% in 1HFY08.

  • Other income drops by as much as 80% YoY in 2QFY08 due to lower fees.

  • Board has approved fresh capital raising by way of ADR/GDR or QIP.

Rs (m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Income from operations 3,324 5,692 71.2% 5,973 10,321 72.8%
Interest Expense 1,678 2,869 71.0% 3,062 5,193 69.6%
Net Interest Income 1,646 2,823 71.5% 2,911 5,128 76.2%
Net interest margin (%)       9.0% 8.4%  
Other Income 16 3 -81.3% 118 178 50.8%
Other Expense 547 730 33.5% 981 1,456 48.4%
Provisions and contingencies 430 630 46.5% 730 1,199 64.2%
Profit before tax 685 1,466 114.0% 1,318 2,651 101.1%
Tax 227 511 125.1% 448 944 110.7%
Profit after tax/ (loss) 458 955 108.5% 870 1,707 96.2%
Net profit margin (%) 13.8% 16.8%   14.6% 16.5%  
No. of shares (m)         191.1  
P/BV (x)*         4.8  
* Book value as on March 2007

Largest asset financing NBFC
Shriram Transport Finance (STFC) is the country’s largest asset financing NBFC (non-banking finance company) with 20% to 25% market share in pre-owned truck financing and 7% to 8% market share in new truck financing. The company has niche presence in the high-yielding pre-owned CV financing business with expertise in loan origination and valuation. It had a total employee base of 6,318 at the end of 1HFY08 and has 391 branches across India with 4 m customers (91.3% of the country’s truck owners).

What has driven performance in 2QFY08?
‘Old’ is gold: Despite the firm trend in interest rates and poor off-take of new CV finance, STFC, given its niche presence in the rural areas and nearly monopolistic share of the organised pre-owned truck financing market, was able to sustain a buoyant growth in its asset book in 1HFY08. The company did so by altering the mix of new and pre owned vehicles in its portfolio.

STFC surpassed the sector average asset growth, reporting a 55.9% YoY growth in disbursements for 1HFY08. Pre-owned CVs continue to enjoy dominance in the company’s portfolio allocation (75% in 1HFY08). This was largely on the back of demand for working capital loans for the pre-owned CVs that were less sensitive to the interest rates and the institution’s ability to re-price the new CVs, thus guarding its NIMs. What has also enabled the institution to halt the drop in its net interest margins (to 8.4%) is the fact that the borrowing profile has been changed reducing the proportion of high cost retail loans to half of that in 1HFY07 (18% in 1HFY08).

Old over new…
(Rs m) 1HFY07 % of total 1HFY08 % of total Change
Disbursements 17,166   26,761   55.9%
New CVs 5,632 32.8% 6,495 24.3% 15.3%
Pre-owned CVs 11,534 67.2% 20,266 75.7% 75.7%
Assets under management 91,401   148,262   62.2%
New CVs 27,352 29.9% 44,845 30.2% 64.0%
Pre-owned CVs 64,049 70.1% 103,417 69.8% 61.5%

STFC currently finances 1 out of every 8 trucks in the country. Over the next four years, the company is targeting to increase its market share to 40% from the present 25% in the pre-owned vehicle segment (asset size of Rs 150 bn, from the current Rs 90 bn). To ensure commensurate reach, the company has tied up with 200 private financiers to grow across India on a franchisee basis - to source loans for old trucks and share the profits therein. It has engaged the erstwhile moneylenders for this purpose. As per the company, this is expected to help it achieve additional disbursements of Rs 20 bn by FY08.

Having said that, India's domestic retail prices of petrol and diesel increased by about 55% and 67% respectively in the last 5 years (prices in Mumbai). Spike in diesel cost (fuel cost is two-third of total operating cost of truck operators) coupled with freight rates not rising commensurately can adversely affect the truck operators’ margins and thereby impact the CV financing industry.

Other income–Volatile trend: The problem with STFC’s business model is its over-reliance on the vehicle financing industry as most of the other (fee) income are derived from the securitisation of assets that, as a practice, the company has intentionally reduced over the years. 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.

Lower costs: STFC’s cost to income ratio remained benign at 27% in 1HFY08 (32% in 1HFY07) due to its operating leverage. However, with the company now recruiting additional field officers, the costs are expected to escalate in the medium term.

Capital comfort: To meet its growth plans, the company has approved to issue 30 m shares by way of ADR/GDR and/or QIP (qualified institutional placements) in FY08. This will add approximately Rs 36 per share on the diluted book value (assuming the issue is at the current market price). Further, 6.9 m warrants held by Shriram Holdings (Madras) have been converted into equity shares of Rs 10 each at a premium of Rs 102 per share in 1HFY08. The equity base of the company is expected to be diluted by 20% in FY08.

What to expect?
At the current price of Rs 271, the stock is fairly valued at 1.8 times our estimated FY10 adjusted book value. While the distinction of being the country’s largest asset financing NBFC, besides the niche presence in the high-yielding pre-owned CV financing business, earns STFC an edge over its peers in terms of net interest margins and provides substantial cushion in a rising interest rate, we believe that most of the medium term upsides have been factored into the stock price. Having said that, excessive reliance on offtake of commercial vehicles and possibility of delinquencies in the event of uneven agricultural harvest and firm interest rates are our lingering concerns with regard to the company.

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