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Shriram Transport Finance Co Limited
On growth highway
Investment rationale
Shriram Transport Finance Company Limited (STFC) is the largest asset
financing NBFC in India, with an AUM of over INR300bn. Over the years, it
has established its presence and reach via a strong network of origination,
disbursement and collection in many pockets of India and also has developed
a strong brand equity in the CV financing.
Strong CV cycle; pre-owned vehicles sales benefitting from supply
constrains in new vehicles
Demand momentum for STFC continues to be robust. The company believes
that the sporadic shortage of new vehicles, which is largely due to constraints
from ancillary suppliers, offers strong tailwinds for the company as it results in
higher turnover in the used vehicles segment.
Liability franchise: Getting stronger
STFC has managed to alter its borrowing profile for advantageous means
and now around 75% of its borrowings are fixed-rate in nature. Thus, the
possibility of a squeeze on NIMs from any hardening of benchmark rates is
likely to have minimal impact on the company's operations.
AUM to touch INR500bn by FY13e
We expect STFC’s AUM to reach INR500bn by FY13e, from current to over
INR300bn. This growth is likely to be supported by a sharper focus on scaling
up partnerships developed with private financiers.
Valuation and outlook
The stock is currently trading at 2.9x FY12e BV and 10.6 FY12e EPS - a
premium to other NBFCs, which we believe is justified given the quasimonopolistic
nature of its business, robust track record of asset quality across
business cycles and superior return ratios.
We reiterate our BUY recommendation with a target price of INR950/share.
At our target price, the stock would trade at 3.5x its FY12e BV and 13x its
FY12e EPS.
Investment rationale
Strong CV cycle; pre-owned vehicles sales benefitting from supply
constrains in new vehicles
Demand momentum for STFC continues to be robust. The company believes that the
sporadic shortage of new vehicles, which is largely due to constraints from ancillary
suppliers, offers strong tailwinds for the company as it results in higher turnover in the
used vehicles segment.
The freight capacity in the system is moving up. This along with gradual hardening of
freights rates (demand aided by pass through of operational costs) and change in
freight carrier movement patterns (to a hub and spoke model) has stoked demand for
pre-owned vehicles. Thus, the demand from rural, semi-urban and urban markets
continues to be on a strong footing.
Liability franchise: Getting stronger
STFC has managed to alter its borrowing profile for advantageous means and now
around 75% of its borrowings are fixed-rate in nature. Thus, the possibility of a squeeze
on NIMs from any hardening of benchmark rates is likely to have minimal impact on
the company's operations. Moreover, the company is also able to re-price incremental
loans quite finely. STFC is also aggressively garnering retail deposits, and we believe
that this move would be beneficial on account of: 1) Mitigating interest rate risk by
locking long term deposits at fixed rates; 2) Raising retail deposits will create stability;
3) Matching the lending and borrowing bucket (Retail borrowing 3, 5 & 7 years),
thereby mitigating ALM mismatch.
AUM to touch INR500bn by FY13e
We expect STFC to record a 20% CAGR in pre-owned CV disbursements and a
slightly higher 22% CAGR for new CVs (due to the lower base in FY10). AUM growth
is estimated to be in line with disbursals at 20% through FY13e (balance sheet growth
is likely to be higher owing to a smaller base in FY10 led by substantial securitisation
in 4QFY10). Growth is likely to be supported by a sharper focus on scaling up
partnerships developed with private financiers.
Unorganised moneylenders control ~70-75% of the market in the pre-owned CV financing
space. STFC, currently has tie-ups with more than 500 such private financiers and loans
originated through them constitute ~10% of incremental disbursals and 5% of outstanding
loan book. The company went slow on these partnerships in FY09 due to tight liquidity
conditions; however, with the improved economic outlook, it plans to increase the total
loan book contribution from private financiers to ~10% in the next 2-3 years.
Valuation and outlook
Best in class return ratios support premium valuations
STFC has a unique business model and strong competencies in the CV financing
space. In our view, it would be difficult for any other bank or financial institution to
compete with the company in its niche area in the near to medium term. It is likely to
report an NII and earnings CAGR of 26% and 25% respectively over FY10-FY13e,
driven by strong demand outlook for CVs, improvement in NIMs and stable asset quality.
Niche presence in a high yielding segment and tight control on loan recovery, STFC has
reported one of the best profitability ratios in the banking and financial services space.
Average RoA stood at over 3% over FY05-10 with average RoE of 25%+. We expect
RoA to improve further to ~4.1 over FY11e-13e due to further improvement in NIMs
(driven by higher securitisation). However, owing to lower leverage on the balance
sheet (given the recent capital raising of INR5.8 bn), RoE is likely to remain ~26-28%.
The stock is currently trading at 2.9x FY12e BV and 10.6 FY12e EPS - a premium to
other NBFCs, which we believe is justified given the quasi-monopolistic nature of its
business, robust track record of asset quality across business cycles and superior
return ratios. We reiterate a BUY recommendation with a target price of INR950/sh.
At our target price, the stock would trade at 3.5x FY12e BV and 13x FY12e EPS.
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