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UBS Investment Research
Key Call: Shriram Transport Finance
Best amongst the rest
„ NIMs likely to be sustained in Q3
We expect Shriram Transport Finance (SHTF) to largely maintain its NIM in Q3 in
spite of volatile credit markets, as 1) it maintains its highly liquid balance sheet and
its cash balance was Rs48bn in Q2 FY11; 2) demand for SHTF’s loan book from
banks remains strong; and 3) it has strong pricing power due to less competition.
„ Disbursements continue to be in line with trend
The disbursement trend remains healthy due to under lying buoyant commercial
vehicle (CV) markets. We forecast a loan CAGR of 23% over FY10-13; growth for
SHTF typically tends to be less cyclical due to the high proportion of used CVs,
demand for which is less volatile than for new CVs. Its commercial equipment
subsidiary’s revenue contribution is strong at 8% of the loan book.
„ Highest ROE in the sector justifies premium valuation
With an NIM of more than 8%, ROA of 3% and high leverage (enabled by high
levels of securitisation) SHTF’s profitability remains the highest in the segment.
While changes in securitisation guidelines will impact future issuances, we believe
company will maintain above-25% ROE. In light of sustainable profitability, we
think the current valuation of 2.6x FY12E P/BV is attractive.
„ Valuation: maintain estimates, reiterate Buy
We expect SHTF to deliver an average ROE of 28% with an average ROA of 3.0%
and an EPS CAGR of 26% over FY10-13. We reiterate our Buy rating on the stock
and maintain it as our preferred sector pick. We base our price target of Rs1,000 on
a residual income model, assuming a discount rate of 13.5%, terminal ROE of
13.5%; and terminal growth of 5% (implied valuation 3.7x FY12E book).
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