Unique business model
Shriram Transport Finance (SHTF), which focuses on the financing of used
commercial vehicles (CV), is among the largest asset finance companies in India
with outstanding assets under management of Rs302bn (US$6.5bn) as of June
2010. Used CV financing is a very under-penetrated market, with SHTF being the
only formal entity. Historically, other companies have attempted to enter the
market but have found it difficult to make inroads because of the market’s ‘close to
customer’ model and customers’ lack of banking practices.
Very profitable segment; Shriram is the largest player
As a result, the company has a 20-25% market share, while local moneylenders
cater to the balance of the market. We forecast demand for used CV financing to
grow strongly over FY10-13 as the stock of new CVs during the last CV cycle
comes up for resale, and rising freight availability on strong economic growth
leads to increased demand for used CVs.
Key risks: change in securitisation guidelines
Bilateral assignments are one of the company’s key sources of funding as well as a
way to manage interest rate risk. The RBI has expressed concerns over the
‘originate to sell’ model and might change the guidelines relating to securitisation
in the near future, which would impact future issuances. We believe SHTF has a
healthy mix of borrowing options and can manage its funding appropriately.
Valuation: growth and high ROE justifies valuation premium
We expect SHTF to deliver an average ROE of 29% with an average ROA of 4.1%
and EPS CAGR of 26% over FY10-13. We initiate coverage with a Buy rating and
a residual income-based price target of Rs1,000. SHTF is one of our preferred
picks in the sector.
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