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Shriram Transport Finance (SRTR.BO)
3Q11 Results: Fundamentally Healthy, But Macro Challenges
Maintain Hold, healthy fundamentals but macro challenges — We revise our
EVA-based target price on Shriram to Rs750, benchmarking it off 2.75x FY12E
P/BV (down from 3.25x). The stock has corrected 25% from its recent peaks, but
valuations are still not cheap relative to the sector (trades at 2.4x FY12E P/B).
Fundamentally, Shriram’s business remains healthy and should deliver consistent
growth and returns; however, tight liquidity, higher interest rates and increasingly
clouded economic growth outlook suggest caution. Maintain Hold (2M).
3Q11 profits up 27% yoy — Shriram’s 3Q11 earnings were 9% below our
estimates but primarily on account of higher regulatory provisioning requirements
on standard assets (would have been marginally ahead excluding these).
Operationally the quarter was sound, led by higher-than-estimated asset growth
and a sharp increase in net interest margins. We raise earnings 12-15% over
FY11-13E to factor these in our estimates.
Profitability to stabilise, modest NIM pressure likely — Net interest margins
jumped sharply to 891bps (+57bpb qoq) as cost of funding benefited from higher
asset securitizations. However, incremental funding costs are higher (10.5% now)
and continued tight liquidity could pressure NIMs – albeit gradually. Fee income
remained low, but management suggests should pick up soon. Overall profitability
should remain stable in our view, with ROEs maintained over 25% levels.
Growth strong, asset quality steady — AUM growth (+31% yoy) was strong,
buoyed by the robust economy and CV cycle, but rising interest rates (and higher
asset base) should lead to moderation (expect stabilization between 20-25%
levels). Asset quality was stable (2.4% NPLs) with over 80% loan loss reserves.
Strong franchise but priced in — Shriram has a niche business with relatively
low competition, higher ability to pass on rate hikes and stable returns, but is
relatively expensive and the stock will likely face headwinds on macro uncertainty
Shriram Transport Finance
Valuation
We value Shriram at Rs750 based on our EVA model, which captures the longterm value of the business and is our standard valuation measure for CIRA
India Banking coverage. Our EVA model assumes: a) a risk-free rate of 8% (in
line with secondary market yields); b) longer-term loan loss provisions of
200bps given its higher asset risk profile; c) loan spreads of 600bps due to its
higher-yielding asset profile; and d) long-term fee income growth of 10%. As a
reference, we benchmark our fair value off 2.75x 1Yr Fwd P/BV, the higher end
of our target multiples for private-sector banks (2-3.5x), based on this, the stock
would be valued at Rs750. We believe Shriram can trade towards the higher
end of private banks during strong economic growth and asset quality cycles
due to its higher loan growth, superior ROE profile and relatively niche lending
segment, with high entry barriers for larger players.
Risks
We rate Shriram Medium Risk, even as our quantitative risk-rating system,
which tracks 260-day historical share price volatility, suggests Low Risk. We
believe Shriram's strong loan growth in recent years, inherently higher asset
risks and sensitivity to the economic environment suggest a Medium Risk
profile. Key upside risks for the stock are: a) Continued easy liquidity / low
interest rate environment; b) Better-than-expected loan growth; and c)
Availability of a banking license. Key downside risks that could cause the stock
to trade below our target include: a) Asset quality - good so far, but rapid pace
of loan growth suggests credit costs can rise; b) Wholesale funding - can hurt in
a tight-liquidity scenario; c) Execution of the planned fee income initiatives; d)
Regulatory changes in the NBFC and transportation sectors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance (SRTR.BO)
3Q11 Results: Fundamentally Healthy, But Macro Challenges
Maintain Hold, healthy fundamentals but macro challenges — We revise our
EVA-based target price on Shriram to Rs750, benchmarking it off 2.75x FY12E
P/BV (down from 3.25x). The stock has corrected 25% from its recent peaks, but
valuations are still not cheap relative to the sector (trades at 2.4x FY12E P/B).
Fundamentally, Shriram’s business remains healthy and should deliver consistent
growth and returns; however, tight liquidity, higher interest rates and increasingly
clouded economic growth outlook suggest caution. Maintain Hold (2M).
3Q11 profits up 27% yoy — Shriram’s 3Q11 earnings were 9% below our
estimates but primarily on account of higher regulatory provisioning requirements
on standard assets (would have been marginally ahead excluding these).
Operationally the quarter was sound, led by higher-than-estimated asset growth
and a sharp increase in net interest margins. We raise earnings 12-15% over
FY11-13E to factor these in our estimates.
Profitability to stabilise, modest NIM pressure likely — Net interest margins
jumped sharply to 891bps (+57bpb qoq) as cost of funding benefited from higher
asset securitizations. However, incremental funding costs are higher (10.5% now)
and continued tight liquidity could pressure NIMs – albeit gradually. Fee income
remained low, but management suggests should pick up soon. Overall profitability
should remain stable in our view, with ROEs maintained over 25% levels.
Growth strong, asset quality steady — AUM growth (+31% yoy) was strong,
buoyed by the robust economy and CV cycle, but rising interest rates (and higher
asset base) should lead to moderation (expect stabilization between 20-25%
levels). Asset quality was stable (2.4% NPLs) with over 80% loan loss reserves.
Strong franchise but priced in — Shriram has a niche business with relatively
low competition, higher ability to pass on rate hikes and stable returns, but is
relatively expensive and the stock will likely face headwinds on macro uncertainty
Shriram Transport Finance
Valuation
We value Shriram at Rs750 based on our EVA model, which captures the longterm value of the business and is our standard valuation measure for CIRA
India Banking coverage. Our EVA model assumes: a) a risk-free rate of 8% (in
line with secondary market yields); b) longer-term loan loss provisions of
200bps given its higher asset risk profile; c) loan spreads of 600bps due to its
higher-yielding asset profile; and d) long-term fee income growth of 10%. As a
reference, we benchmark our fair value off 2.75x 1Yr Fwd P/BV, the higher end
of our target multiples for private-sector banks (2-3.5x), based on this, the stock
would be valued at Rs750. We believe Shriram can trade towards the higher
end of private banks during strong economic growth and asset quality cycles
due to its higher loan growth, superior ROE profile and relatively niche lending
segment, with high entry barriers for larger players.
Risks
We rate Shriram Medium Risk, even as our quantitative risk-rating system,
which tracks 260-day historical share price volatility, suggests Low Risk. We
believe Shriram's strong loan growth in recent years, inherently higher asset
risks and sensitivity to the economic environment suggest a Medium Risk
profile. Key upside risks for the stock are: a) Continued easy liquidity / low
interest rate environment; b) Better-than-expected loan growth; and c)
Availability of a banking license. Key downside risks that could cause the stock
to trade below our target include: a) Asset quality - good so far, but rapid pace
of loan growth suggests credit costs can rise; b) Wholesale funding - can hurt in
a tight-liquidity scenario; c) Execution of the planned fee income initiatives; d)
Regulatory changes in the NBFC and transportation sectors.
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