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Shriram Transport Finance
Reuters: SRTR.BO Bloomberg: SHTF IN Exchange: BSE Ticker: SRTR
Well positioned even if PSL status is removed. Buy
Healthy upside even in stressed case; reiterating Buy
Some investors have been concerned about the impact on STFC if the priority
sector lending (PSL) status of its assets is done away with, more so due to recent
events in the microfinance sector and the RBI asking banks not to treat gold loans
as agriculture loans. While we attach low probability to the rather extreme event of
STFC’s PSL status being removed, our impact assessment shows that the target
price could decline by 9-12%, which would still leave 10-14% upside potential
from the current market price. We reiterate our Buy and INR895 target price.
Cost of funds would rise if PSL status were removed…
Since almost all of STFC’s liabilities benefit from the PSL status of its assets, we
estimate removal of the status would lead to cost of funds rising by ~100bps.
Also, STFC may not be able to securitise its assets as there would not be any
demand from banks. This would mean that NIM on AuM would decline and
converge towards on-balance-sheet NIM. At the same time, STFC would not have
to incur expenses related to securitisation. If we build these into our estimates for
FY12 the resultant target price is INR789, 12% below our base-case target but still
10% above the current market price (CMP).
…but strong pricing power should cushion the impact
The above assumes no change in yield on assets. But being the largest organised
player in the used CV financing segment, STFC enjoys considerable pricing power
and should be able to pass on the funding cost increase. If we assume that STFC
raises lending rates by ~50bps to counter a ~100bps rise in funding costs, then
the resultant target is INR817, 9% below our base case target but still 14% above
CMP. This analysis assumes eliminating benefits from the existing securitized
book, whereas in reality only the incremental securitization does not take place.
P/BV-RoE valuation; inability to pass on rise in funding costs a key risk
We value STFC on a single-stage Gordon Growth Model P/BV = (RoE – g)/ (CoE –
g) and multiply the resultant theoretical P/BV by December 2012E adjusted BVPS
to arrive at our target price. Key risks are inability to pass on any increase in
funding costs and large cash collections exposing STFCto misappropriation.
We attach low probability to removal of PSL status
PSL was started with a view to making obtaining credit easier to weaker/credit deprived
sections of society. Even in the case of the microfinance (MFI) sector, where there has been
a lot of noise, the regulators have not removed the PSL status. Likewise, small road transport
operators (SRTOs), which form the bulk of the assets for STFC, is a credit-deprived segment
and most of the time the alternative for these businesses is to borrow from private money
lenders at usurious rates. Also, we feel it is unlikely that the RBI would try to put a cap on
lending rates as they have reiterated many times that they wish to move away from a regime
of controlled interest rates.
Sensitivity analysis
We have made the following assumptions in our analysis
„ Cost of funds rise by ~100bps – some credit rating agencies have opined that due to the
removal of PSL status on gold loans the cost of funds for NBFCs that provide gold loans
may rise by 100bps. Our interactions with STFC and other banks indicate a similar
number.
„ STFC may not be able to do any securitisation and hence NIM on AuM would decline
and converge towards NIM for on-balance sheet assets.
„ STFC would not have to incur securitization-related expenses – origination, credit
facilities, etc.
„ Balance sheet size would increase as off-balance sheet assets would come on balance
sheet.
„ This analysis assumes the elimination of benefits from the existing securitized book,
whereas in reality only the incremental securitization does not take place.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance
Reuters: SRTR.BO Bloomberg: SHTF IN Exchange: BSE Ticker: SRTR
Well positioned even if PSL status is removed. Buy
Healthy upside even in stressed case; reiterating Buy
Some investors have been concerned about the impact on STFC if the priority
sector lending (PSL) status of its assets is done away with, more so due to recent
events in the microfinance sector and the RBI asking banks not to treat gold loans
as agriculture loans. While we attach low probability to the rather extreme event of
STFC’s PSL status being removed, our impact assessment shows that the target
price could decline by 9-12%, which would still leave 10-14% upside potential
from the current market price. We reiterate our Buy and INR895 target price.
Cost of funds would rise if PSL status were removed…
Since almost all of STFC’s liabilities benefit from the PSL status of its assets, we
estimate removal of the status would lead to cost of funds rising by ~100bps.
Also, STFC may not be able to securitise its assets as there would not be any
demand from banks. This would mean that NIM on AuM would decline and
converge towards on-balance-sheet NIM. At the same time, STFC would not have
to incur expenses related to securitisation. If we build these into our estimates for
FY12 the resultant target price is INR789, 12% below our base-case target but still
10% above the current market price (CMP).
…but strong pricing power should cushion the impact
The above assumes no change in yield on assets. But being the largest organised
player in the used CV financing segment, STFC enjoys considerable pricing power
and should be able to pass on the funding cost increase. If we assume that STFC
raises lending rates by ~50bps to counter a ~100bps rise in funding costs, then
the resultant target is INR817, 9% below our base case target but still 14% above
CMP. This analysis assumes eliminating benefits from the existing securitized
book, whereas in reality only the incremental securitization does not take place.
P/BV-RoE valuation; inability to pass on rise in funding costs a key risk
We value STFC on a single-stage Gordon Growth Model P/BV = (RoE – g)/ (CoE –
g) and multiply the resultant theoretical P/BV by December 2012E adjusted BVPS
to arrive at our target price. Key risks are inability to pass on any increase in
funding costs and large cash collections exposing STFCto misappropriation.
We attach low probability to removal of PSL status
PSL was started with a view to making obtaining credit easier to weaker/credit deprived
sections of society. Even in the case of the microfinance (MFI) sector, where there has been
a lot of noise, the regulators have not removed the PSL status. Likewise, small road transport
operators (SRTOs), which form the bulk of the assets for STFC, is a credit-deprived segment
and most of the time the alternative for these businesses is to borrow from private money
lenders at usurious rates. Also, we feel it is unlikely that the RBI would try to put a cap on
lending rates as they have reiterated many times that they wish to move away from a regime
of controlled interest rates.
Sensitivity analysis
We have made the following assumptions in our analysis
„ Cost of funds rise by ~100bps – some credit rating agencies have opined that due to the
removal of PSL status on gold loans the cost of funds for NBFCs that provide gold loans
may rise by 100bps. Our interactions with STFC and other banks indicate a similar
number.
„ STFC may not be able to do any securitisation and hence NIM on AuM would decline
and converge towards NIM for on-balance sheet assets.
„ STFC would not have to incur securitization-related expenses – origination, credit
facilities, etc.
„ Balance sheet size would increase as off-balance sheet assets would come on balance
sheet.
„ This analysis assumes the elimination of benefits from the existing securitized book,
whereas in reality only the incremental securitization does not take place.
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