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SHRIRAM TRANSPORT 2QFY11: Business momentum remains strong; robust operating parameters drive profitability, Buy
Shriram Transport (SHTF IN, Mkt Cap US$4.1b, CMP Rs810, Buy) 2QFY11 PAT grew 44% YoY to Rs3b (our est of Rs3.1b) driven by ~43% YoY growth in Net income (including income from securitization). This was led by disbursements growth of 28% YoY and improvement in NIMs (on AUM) by 113bp YoY and 20bp QoQ to 8.34%. Growth in AUM was 23% YoY to Rs317b.
Key highlights
- SHTF reported 2QFY11 PAT growth of 44.1% YoY (vs est of 51% YoY) at Rs3b.
- Net income (including income from securitization) was up 42.8% YoY to Rs7.5b. NIMs on AUM improved to 8.34% vs 7.21% in 2QFY10 and 8.13% in 1QFY11.
- Disbursements during the quarter increased 27.6% YoY to Rs45.7b. During the quarter, SHTF securitized Rs25.5b of loan portfolio (8% of total AUM).
- AUM at the end of 2QFY11 stood at Rs317b up 23% YoY.
- Gross NPA have remained stable QoQ at 2.54% and management is using its strong profitability to enhance provisioning coverage ratio (currently at 81%). Net NPA at the end of quarter were 0.49% vs 0.44% QoQ.
We believe the improvement in economic scenario would keep business momentum strong and robust operating parameters would drive profitability for SHTF. We estimate SHTF to report EPS of Rs59 in FY11 and Rs70 in FY12. BV would be Rs218 in FY11 and Rs275 in FY12. The stock trades at 2.9x FY12 BV and 11.5x FY12 EPS. RoAs are expected to remain 5%+ while RoEs would be strong at ~30% during FY11-12E. Maintain Buy with target price of Rs960 (3.5x FY12 BV and 14x implied PE).
AUMs increase 23% YoY, Off-balance sheet AUM increased 106% YoY
- Overall disbursements grew 27.6% YoY and 15% QoQ to Rs45.7bn; proportion of Used CV disbursements to total disbursements were lower at 76% in 2QFY11 (vs 84% in 1QFY11 and 80% in 2QFY10). Incremental disbursement in new CV sales was higher as SHTF benefited from opportunity of strong demand in new CV sales.
- SHTF securitized Rs25.5b loans during the quarter (this was largely from new CV financing). In previous quarter, there was no securitization.
- Overall AUM grew 23% YoY (up 4.9% QoQ) to Rs317b. Used truck AUM grew 21% YoY (4.6% QoQ) to Rs245.3b. Share of new vehicle finance in overall AUM remained stable at 22.6% YoY and also QoQ.
- AUM on books remained flat on a YoY and QoQ basis to Rs204.5b due to higher securitization done during the quarter. However AUM off books increased 106% YoY (on a lower base) and 13.5% QoQ to Rs112.6b
Margins improved YoY and QoQ
- Net income (including securitization income) grew 43% YoY to Rs7.5b (7.3% QoQ)
- Reported NIMs on AUM increased 113bp YoY and 21bp QoQ to 8.34%. Improvement in yields by 10bps QoQ and decline in cost of fund by 10bps aided the margin expansion. Management states that the increase in Base rate and BPLR by banks is still to be reflected and expects the cost of funds to inch up in 2HFY11.- Further, higher securitization during the quarter also enabled SHTF to manage its cost effectively.
- As a part of conscious strategy, SHTF is increasing the proportion of fixed rate liabilities in its borrowing profile. During the quarter it has raised Rs6bn as retail fixed deposits. At the end of 2QFY11, 75% of the liabilities are on a fixed rate basis.
- Borrowings at the end of the quarter were down 4.7% YoY but were up 4.2% QoQ.
C/I ratio increases, but increase in cost is on account of fund raising
- Operating expenses grew 65.7% YoY and 16.4% QoQ. Cost to Income ratio increased to 26.2% up from 23.7% QoQ and 22.7% YoY.
- The increase was largely on account of brokerage/ commission charges paid for raising retail fixed deposits and upfront charges paid for securitization done during the quarter. The charges for these two combined was higher by ~Rs200m on an incremental basis. Adjusted for this CI ratio would have been at around 1QFY11 levels.
Asset quality remains stable QoQ
- Gross NPA have remained stable QoQ at 2.54% and management is using its strong profitability to enhance provisioning coverage ratio (currently at 81%). Net NPA at the end of quarter were 0.49% vs 0.44% QoQ
- Gross NPAs in absolute terms were at Rs5.2b vs 5.1b in 1QFY11 whereas Net NPAs stood at Rs977m vs 881m a quarter ago.
- Provisions towards NPAs/ bad debts written off as a % total assets were at 1.8% vs 1.9% in 1QFY11 and 1.7% in 2QFY10.
Other highlights
- Fee income from Automall initiative was Rs85.5m during the quarter while for 1HFY11 it was Rs146.1m
- SHTF’s construction equipment financing business has commenced operations from Oct-10. It is targeting AUM of Rs60b by FY13 for this business and expects to earn ROA of 2.5-3%.
Earning visibility remains strong; Maintain Buy
- Strong origination capabilities, loyal customer base and improved economic activity will lead to healthy AUM growth.
- SHTF has ventured into construction equipment finance, increased its thrust on securitization and undertaken taken fee income initiatives like Truck bazaars and Automalls, which we believe would augur well for future business growth and profitability.
- We expect SHTF to report EPS of Rs59 in FY11 and Rs70 in FY12. BV would be Rs218 in FY11 and Rs275 in FY12.
- The stock trades at 2.9x FY12 BV and 11.5x FY12 EPS. ROAs are expected to remain 5%+ while RoEs would be strong at ~30% during FY11-12E. Maintain Buy with target price of Rs960 (3.5x FY12 BV and 14x implied PE).
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