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  • Dec 26, 2006 - Shriram Transport - Well entrenched business model

Shriram Transport - Well entrenched business model
Dec 26, 2006

We recently attended the analyst meet of Shriram Transport Finance, one of the largest asset financing companies in the country. Besides giving a perspective on the prospects of the CV financing industry and Shriram Transport’s positioning in it, the meet helped distinguish the role of asset financing companies against that of banks in this business. Following are some of the key excerpts from the meet. CV Financing - Market Potential
The total truck population in the country at present is approximately 4 m (Rs 450 bn in value terms). The market can be divided as per the age profile of the trucks.

  1. Trucks between 0 to 5 years of age: 27% of the trucks (approximately 1.2 m vehicles) belong to this segment with a market size of Rs 225 bn. This segment is largely financed by banks and asset finance companies, with ICICI Bank and Sundaram Finance having a major share.

  2. Trucks between 5 to 12 years of age: 41% of the trucks (approximately 1.6 m vehicles) belong to this segment with a market size of Rs 125 bn. 75% of this segment is financed by unorganised players with the rest 25% being catered to by Shriram Transport.

  3. Trucks over 12 years of age: With a market size of Rs 100 bn, 32% of the trucks (approximately 1.2 m vehicles) belong to this segment. This segment is entirely funded by the private financers (unorganised players). Most trucks in this segment are to be phased out in the next 5 to 6 years leading to higher demand for trucks in the age profile of 5 to 12 years.

Industry growth drivers
There are several policy and legislative factors that are expected to propel the demand for ‘younger’ vehicles in the industry - leading to the phasing out of vehicles in the 5 to 12 years age profile and thus reducing the dominance of unorganised financers in the market.

  • Stricter emission norms. Bharat III emission norms already implemented in 11 cities. To be implemented in other cities by FY10.

  • Legislative pressure on banning trucks beyond 15 years is likely to trigger replacement boom.

  • Transport Association’s introduction of Voluntary Retirement Scheme for old trucks with better financing options.

  • Truck financing brought under the net of ‘priority sector financing’ segment for banks.

Shriram Transport-Well entrenched business model
Shriram Transport 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 3,853 at the end of FY06 and has 321 branches across India with 4 m customers (91.3% of the country’s truck owners).

Growth strategies and targets
Shriram Transport currently finances one 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). The company has tied up with 200 private financiers across India on a franchisee basis to source loans for old trucks and share the profits therein. This is expected to help it achieve additional disbursements of Rs 20 bn by FY08.

Our view
With an average loan size of Rs 0.2 m, duration of 3 years, NIMs of 9% (nearly double of that enjoyed by banks), loan to value of 60% (80% in case pf banks) and impressive asset quality (0.5% Net NPA), Shriram Transport positions itself very favourably against its banking peers. Also the RBI incentive of allowing NBFCs to offer co-branded credit cards (Shriram Transport has already tied up with UTI Bank for the same) opens up scope for the company to earn fee income that its so long devoid of. At the current price of Rs 132, the stock is valued at 2.6 times its FY06 adjusted book value. We shall soon initiate our coverage on the stock.

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