Shriram Transport Finance -Up PO on strong momentum; BofA ML

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Shriram Transport Finance
Up PO on strong momentum;
positive risk-return
􀂄 Raise PO on strong momentum; risk-return positive
We raise our PO to Rs970, post strong 2QFY11 earnings, earnings upgrade and
likely re-rating. Moreover, STFC has been a market performer over last 1/3
months, but given 1) strong visibility of earnings growth sustaining (+34% in
FY11E and +25% in FY12E); 2) RoAs and RoEs at +4.5% and +28%, resp. in
FY12E, highest and; 3) comfort on asset quality (net NPLs at 0.5%; cover at
+80%), we believe the stock can trade up to +3.5-3.6-x FY12E book (currently
trades at 3.0x FY12E book). Alternatively, on P/E, stock is trading at ~11.5x
FY12E EPS, we believe it can trade up to ~14x FY12E, still a +15-20% discount
to market multiples.
2QFY11: Earnings beat est by 3%; +6-7% adj. for one-offs
STFC reported earnings of Rs3bn, a +44% yoy growth and +3% ahead of
estimates. But given conservative a/c policy followed there is a one-off expense of
+Rs110-120mn on a/c of broker fees up fronted by STFC for raising retail
deposits (+6bn), adjusted for which earnings are +6-7% higher than est. AUM
growth strong at 23% yoy, but more importantly disbursement growth is also very
strong at 28% yoy. Margins (AUM) are up +110bps yoy to +8.3% owing to prudent
ALM management, raising the share of used vehicle loans, and securitization.
Asset quality comfortable- gross at 2.5% and net at 0.5%, prov. cover at +81%.
Raise earnings by 4% each; growth of +34/25% in FY11/12E
We have raised our earnings by 4% each for FY11/12. We estimate earnings
growth of +34/25% in FY11/12, driven by +23-24% loan growth, margin expanding
and a rise in share of fees as it jumpstarts the auto mall and truck bazaar biz.
Asset quality to remain manageable, with coverage at +90% by FY12E.