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Shriram Trans Fin: Mining ban impacts profits - Views on News from Equitymaster

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Shriram Trans Fin: Mining ban impacts profits
Nov 14, 2011

Shriram Transport Finance (STFC) declared its results for the second quarter of the financial year 2011-12. The institution grew its interest income by 12% YoY while the profits remained flat.

Performance summary
  • Interest income grows 12% YoY in 2QFY11 with a healthy growth in assets under management of 20%.
  • Net interest margins improve marginally to 7.9%, from 7.8% 1HFY11.
  • Other income declines by 2% in 2QFY12, for the half year it increased by 12%.
  • Net profits remain flat, growing by only 0.2% YoY in 2QFY12 on account of higher provisioning.
  • Gross NPAs increased to 2.69% from 2.54% earlier, while the net NPA ratio declined to 0.41% in 1HFY12 from 0.5% in 1HFY11.
  • The company also declared an interim dividend of Rs 2.5 per share.

Rs (m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Income from operations 12,915 14,465 12.0% 25,161 28,068 11.6%
Interest Expense 6,078 6,193 1.9% 11,757 12,118 3.1%
Net Interest Income 6,837 8,272 21.0% 13,404 15,950 19.0%
Net interest margin (%)       7.8% 7.9%  
Other Income 460 450 -2.2% 1,060 1,184 11.6%
Other Expense 1,633 1,904 16.6% 3,204 3,696 15.4%
Provisions and contingencies 1,203 2,363 96.4% 2,454 3,783 54.2%
Profit before tax 4,461 4,454 -0.2% 8,806 9,654 9.6%
Tax 1,472 1,460 -0.8% 2,927 3,187 8.9%
Profit after tax/ (loss) 2,990 2,994 0.2% 5,879 6,467 10.0%
Net profit margin (%) 23.1% 20.7%   23.4% 23.0%  
No. of shares (m)         226.2  
Book value per share (Rs)         243.3  
P/BV (x)*         2.3  
* Book value as on 30th September 2011

What has driven performance in 1HFY12?
  • 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 higher NIMs of 7.9% in 1HFY12 as against 7.8% in 1HFY11. This was nevertheless at least 3% higher than that of the best performing banks. The institution sustained robust return on equity of 24.7%, however this declined from the 27.9% seen at the end of FY11. STFC plans to sustain NIMs of 7-8% for the year. The bank has however not really done much securitisation this year, on account of uncertanity on account of regulatory guidelines. Plus, with an increased base rates of banks, the institution has not seen much benefits on this account.

  • 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 only 12% in 1HFY12. Growth was much slower than what was seen at the end of FY11 (36% growth). New CV disbursement increased by 20% during 1HFY12, with customers preferring smaller vehicles. The company reduced its disbursement growth target to 10%, versus the 15% target earlier. We may have to revise our estimates on this account.

    Disbursement growth slows...
    (Rs m) 1HFY11 % of total 1HFY12 % of total Change
    Truck receivables 204,485     242,091   18.4%
    Disbursements 85,384   95,786   12.2%
    New CVs 17,416 20.4% 20,865 21.8% 19.8%
    Pre-owned CVs 67,969 79.6% 74,921 78.2% 10.2%

    While STFC's borrowing profile is largely tilted in favour of banks, the institution derived 79% of its funds from banks in 1HFY12 as against 81% in 1HFY11. 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 does not participate in the CP market, and as an alternative source of funding it is looking at raising 2-3 year bonds.

    STFC's cost to income ratio remained benign at 22% in 1HFY12 due to its strong operating leverage. The company added 1,468 new employees in the quarter. The company stands well capitalized with its capital adequacy in excess of 23.8% at the end of 1HFY12. This will enable it to sustain its loan growth in the medium term, and it does not foresee a requirement for additional capital.

    Provisions almost doubled in 2QFY12 on account of higher writeoffs and other general provisioning. Almost Rs 600 m was written off in areas exposed to the mining area in the states of Karnataka, Goa etc. Some of the vehicles in this area have also been repossessed. However, on account of the increased provisioning net NPAs declined to 0.4% in 1HFY12 from 0.5% earlier.

What to expect?
At the current price of Rs 557, the stock is valued at 1.5 times our estimated FY14 adjusted book value. The company has put up a decent show despite the various uncertainties in the macro environment. This includes the RBI's interest rate policy as well as its regulatory stance. Diesel and other fuel prices have also seen a hike. Consequently, growth has seen some slowdown, which we have factored into our estimates for the year. However, seeing the situation on the ground, the management has revised its disbursement growth estimates for the year, which we have yet to factor into our estimates.

There have been some write-offs on account of the company's exposure to projects in the mining belt on account of adverse regulations. The company has however been conservative in its provisioning stance and maintains a high coverage ratio (85%in 1HFY12). It also wants to focus on yield management, and its older vehicle portfolio in order to maintain its NIMs at 7-8%. Due to the higher interest rate cycle, we have also assumed slightly deteriorating asset quality for the year. However, we may have to slightly revise our estimates to factor in slower growth in revenues for FY12.

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