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Shriram Transport (SHTF)
Banks/Financial Institutions
Growth on track, margins buoy earnings. STFC reported strong earnings (PAT up
27% yoy, 6% below estimates) on the back of steady (20%) loan growth and NIM
improvement. Stable asset quality performance and opex supported earnings though
provisions for standard assets tempered PAT growth; core earnings were up 38% yoy.
Reasonable valuations (post the recent correction) and strong quarterly performance are
clearly encouraging; we tweak earnings marginally. Retain ADD with TP of Rs800.
Core earnings in line
STFC reported core PBT (PBT before provisions) growth of 38%, 6% ahead of our estimates.
�� Growth story continues. Disbursements growth of 30% has driven 20% growth in truck
loans under management. The share of new vehicles loans increased to 30% of disbursements
from 17% in 3QFY10 and 24% in 2QFY11; disbursements for pre-owned vehicles was up 12%
yoy. However, share of pre-owned vehicles in overall truck assets under management has been
increasing (79% of truck loans as compared to 74% in 3QFY10 and 77% in 2QFY09) likely due
to weaker traction of new vehicles loans in the recent quarters; the trend will likely reverse or
moderate hereon. Loan growth in 3QFY11 was affected by higher base (due to loan buyout
from GE Capital in 3QFY10); we expect the loan growth trend to pick up towards the end of
the year and are accordingly modeling about 24% loan growth for FY2011E and 22% for
FY2012E.
�� Margins improvement a surprise. STFC reported qoq NIMs (as per KS estimates) of 10.2% as
compared to 9.6% in 2QFY11 and 9.4% in 1QFY11. Key reasons for NIM improvement:
�� STFC securitized loans of Rs15 bn during the quarter which funded about 75% of the
incremental loan book. Lower rate of interest on loans securitized due to the high credit
rating of the loan pool and priority sector categorization of these loan pools has likely
supported borrowings cost for the quarter.
�� STFC has about Rs50 bn (25% of total borrowings on balance sheet) of bank loans which
are linked to PLR/base rate; the sharp rise in PLR/base rate towards the end of the quarter
has not affected the borrowings cost for these loans. According to the management, some
of the high-cost borrowings raised in 2009 were replaced in the recent past.
• We believe that rising interest rates in the system will put pressure on NIMs across
NBFCs and are modeling 30-40 bps NIM compression in our model. While STFC is
better-placed due to loan securitizations (which carry a lower rate), the impact on
NIM is inevitable. Unlike home loans, auto loans (including STFC’s truck loan book)
carry a fixed rate without any covenants to pass on increase or decrease in
borrowings cost. STFC has about Rs70-80 bn of borrowings which carry a variable
rate (including bank PLR/base rate-linked loans of Rs50 bn).
Asset quality performance stable but standard asset provisions pull down
reported earnings
STFC made standard asset provisions of Rs550 mn in order to comply with standard asset
provisioning requirement of 0.25% as prescribed by RBI on Jan 17, 2011. Excluding the
provision for standard assets, PBT was up 43% yoy and 7% ahead of estimates. NPLs were
stable—gross NPL ratio was 2.4% as compared to 2.5% in 2QFY11. We believe that rising
auto prices and underlying demand for freight remains strong in the near term and hence
asset quality performance will likely remain strong.
Other highlights of the quarter
�� Fees from trading were muted at Rs62 mn. The auto mall business is yet to scale
up.
�� Operating expenses were up 70% yoy on the back of strong expansion efforts—
the company has recruited 1,011 employees to take the total strength to 15,947.
The ratio of operating expenses to net operating income remains 26%—stable
qoq.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport (SHTF)
Banks/Financial Institutions
Growth on track, margins buoy earnings. STFC reported strong earnings (PAT up
27% yoy, 6% below estimates) on the back of steady (20%) loan growth and NIM
improvement. Stable asset quality performance and opex supported earnings though
provisions for standard assets tempered PAT growth; core earnings were up 38% yoy.
Reasonable valuations (post the recent correction) and strong quarterly performance are
clearly encouraging; we tweak earnings marginally. Retain ADD with TP of Rs800.
Core earnings in line
STFC reported core PBT (PBT before provisions) growth of 38%, 6% ahead of our estimates.
�� Growth story continues. Disbursements growth of 30% has driven 20% growth in truck
loans under management. The share of new vehicles loans increased to 30% of disbursements
from 17% in 3QFY10 and 24% in 2QFY11; disbursements for pre-owned vehicles was up 12%
yoy. However, share of pre-owned vehicles in overall truck assets under management has been
increasing (79% of truck loans as compared to 74% in 3QFY10 and 77% in 2QFY09) likely due
to weaker traction of new vehicles loans in the recent quarters; the trend will likely reverse or
moderate hereon. Loan growth in 3QFY11 was affected by higher base (due to loan buyout
from GE Capital in 3QFY10); we expect the loan growth trend to pick up towards the end of
the year and are accordingly modeling about 24% loan growth for FY2011E and 22% for
FY2012E.
�� Margins improvement a surprise. STFC reported qoq NIMs (as per KS estimates) of 10.2% as
compared to 9.6% in 2QFY11 and 9.4% in 1QFY11. Key reasons for NIM improvement:
�� STFC securitized loans of Rs15 bn during the quarter which funded about 75% of the
incremental loan book. Lower rate of interest on loans securitized due to the high credit
rating of the loan pool and priority sector categorization of these loan pools has likely
supported borrowings cost for the quarter.
�� STFC has about Rs50 bn (25% of total borrowings on balance sheet) of bank loans which
are linked to PLR/base rate; the sharp rise in PLR/base rate towards the end of the quarter
has not affected the borrowings cost for these loans. According to the management, some
of the high-cost borrowings raised in 2009 were replaced in the recent past.
• We believe that rising interest rates in the system will put pressure on NIMs across
NBFCs and are modeling 30-40 bps NIM compression in our model. While STFC is
better-placed due to loan securitizations (which carry a lower rate), the impact on
NIM is inevitable. Unlike home loans, auto loans (including STFC’s truck loan book)
carry a fixed rate without any covenants to pass on increase or decrease in
borrowings cost. STFC has about Rs70-80 bn of borrowings which carry a variable
rate (including bank PLR/base rate-linked loans of Rs50 bn).
Asset quality performance stable but standard asset provisions pull down
reported earnings
STFC made standard asset provisions of Rs550 mn in order to comply with standard asset
provisioning requirement of 0.25% as prescribed by RBI on Jan 17, 2011. Excluding the
provision for standard assets, PBT was up 43% yoy and 7% ahead of estimates. NPLs were
stable—gross NPL ratio was 2.4% as compared to 2.5% in 2QFY11. We believe that rising
auto prices and underlying demand for freight remains strong in the near term and hence
asset quality performance will likely remain strong.
Other highlights of the quarter
�� Fees from trading were muted at Rs62 mn. The auto mall business is yet to scale
up.
�� Operating expenses were up 70% yoy on the back of strong expansion efforts—
the company has recruited 1,011 employees to take the total strength to 15,947.
The ratio of operating expenses to net operating income remains 26%—stable
qoq.
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