UBS Key Call: Shriram Transport Finance: Weakness—an opportunity to buy

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UBS Investment Research
Key Call: Shriram Transport Finance
Weakness—an opportunity to buy
􀂄 Concerns on NIM are overdone
The reaction on concerns over Shriram Transport Finance’s (SHTF) net interest
margin (NIM) appears excessive, in our view. We estimate NIM will normalize
from 8.34% in Q2FY11 to 8.1-8.2% over the next two quarters. We continue to
believe SHTF will be able to maintain NIM above 8% given its strong pricing
power in the segment. Also, as we go into Q4FY11, demand for buying out priority
loans from banks towards the year-end can provide low-cost funds to SHTF
(though we have not yet incorporated this into our valuation).

􀂄 Expect growth of 22-25% over the next two years
We forecast demand for used commercial vehicle (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. We forecast assets under management (AUM) growth of
23% over FY10-13.

􀂄 High returns + attractive valuations
We expect return on assets (ROA) for SHTF to improve 30bps in FY11-12 (over
FY10) to 3% while return on equity (ROE) will range between 26-28% over the
same period with stable NIM, operational efficiency, and improving asset quality
trends. We estimate a 21% CAGR for EPS over FY11-13 based on which
valuations at 2.6x FY12E P/BV and 10x FY12E PE look attractive. The stock has
corrected 17% over the past one month and has underperformed the broader
markets by 9%.

􀂄 Valuation: reiterate Buy (Key call), price target of Rs1000
We derive our price target of Rs1,000 based on a residual income model. Our price
target implies 3.7x FY12E P/BV and 14x FY12E PE.