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Shriram Transport
Riding on the CV boom; initiate with OUTPERFORM
We initiate coverage with OUTPERFORM and price
target of Rs980 based on 3.5x FY12E P/BV.
Niche in financing used trucks – a segment that has
high margins and little competition. A robust credit
management system has helped control NPLs and
generate higher-than-sector RoA of 4.3% in 9M FY11.
We expect earnings to grow by 22% over FY11-13E on
the back of strong CV sales, market share gains and
diversification into new business lines.
We believe the stock should re-rate on the back of
sustained profitability and strong earning outlook.
Niche player in a profitable segment – We like Shriram
Transport for its niche presence in the used truck operator
segment that does not have access to formal sources of
funds like banks and NBFCs. Strong risk management and
collection practices, and its unique competitive position
have enabled the company to achieve strong profitability
with higher-than-sector RoA at 4.3% in 9M FY11. We
expect the company to maintain above-industry RoA of
4.5% over FY12-13E.
Earnings growth aided by diversification – We expect
the growth momentum to continue. We expect loans to grow
24% p.a. and earnings to grow 22% over FY11-13E. In
addition, the company’s diversification into non-CV financing
businesses such as financing construction equipment and
two-wheelers are likely to add to its profitability and help
sustain future earnings growth.
Valuation – Our priced target of Rs980 for Shriram
Transport is based on 3.5x P/BV. We have used sustainable
RoE of 25%, cost of equity of 13.0% and sustainable growth
rate of 8%. We believe the premium valuation over most
banks and NBFCs is justified by its higher profitability, a
dominant market share and robust asset quality.
Risks – Cyclical nature of the loan book, diversification into
unrelated businesses and regulatory changes are key
downside risks.
Valuation
Our priced target of Rs980 for Shriram Transport is based on 3.5x FY12E P/BV. We have used
sustainable RoE of 25%, cost of equity of 13% and sustainable growth rate of 8%. Over the past
five years, Shriram has traded at a high multiple of 3.9x P/BV one-year forward, low multiple of
1.1x and average multiple of 2.1x. We believe Shriram will likely trade at a premium to its fiveyear
average multiple and to other financial stocks on the back of its consistent earnings delivery,
high profitability and low NPLs.
Risks
Cyclical nature of commercial vehicle lending
Commercial vehicles are sensitive to business cycles both in terms of growth as well as servicing.
Diversification into unrelated businesses
Shriram Transport’s diversification into other business lines – construction equipment, tractors,
utility vehicles and 2 wheeler financing has been rapid, with the company’s ability to manage
profitability and risks in these lines yet untested.
Regulatory risk
The company actively uses loan assignment / securitisation as a source of funding due to the
capital it frees up and the lower cost of borrowing it offers by virtue of its priority status. Should
regulatory views on capital requirements on off-balance sheet items and priority status eligibility
change, cost of funds will increase.
Higher-than-expected credit losses
Higher-than-expected credit losses, particularly in non-CV business lines which Shriram
Transport has relatively lesser experience with, could impact our earnings estimates. For every
25bps increase in credit costs, earnings decline by 5%.
Company profile
Shriram Transport Financing Company is one of the largest asset financing NBFCs with AUM of
approximately Rs330bn. The company finances used and new commercial vehicles as well as
tractors, small utility vehicles, 3-wheelers, passenger commercial vehicles and construction
equipment through a pan-India presence of 487 branches.
Management team
Managing Director: R. Sridhar
Joined Shriram Group in 1985 and has been the Managing Director since September 2000 along
with holding directorship in other Shriram Group companies. He is a fellow member of the
Institute of Chartered Accountants of India.
CFO: Parag Sharma
Joined in 1992 and now heads the Finance function, a qualified Cost Accountant with over 18
years experience in finance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport
Riding on the CV boom; initiate with OUTPERFORM
We initiate coverage with OUTPERFORM and price
target of Rs980 based on 3.5x FY12E P/BV.
Niche in financing used trucks – a segment that has
high margins and little competition. A robust credit
management system has helped control NPLs and
generate higher-than-sector RoA of 4.3% in 9M FY11.
We expect earnings to grow by 22% over FY11-13E on
the back of strong CV sales, market share gains and
diversification into new business lines.
We believe the stock should re-rate on the back of
sustained profitability and strong earning outlook.
Niche player in a profitable segment – We like Shriram
Transport for its niche presence in the used truck operator
segment that does not have access to formal sources of
funds like banks and NBFCs. Strong risk management and
collection practices, and its unique competitive position
have enabled the company to achieve strong profitability
with higher-than-sector RoA at 4.3% in 9M FY11. We
expect the company to maintain above-industry RoA of
4.5% over FY12-13E.
Earnings growth aided by diversification – We expect
the growth momentum to continue. We expect loans to grow
24% p.a. and earnings to grow 22% over FY11-13E. In
addition, the company’s diversification into non-CV financing
businesses such as financing construction equipment and
two-wheelers are likely to add to its profitability and help
sustain future earnings growth.
Valuation – Our priced target of Rs980 for Shriram
Transport is based on 3.5x P/BV. We have used sustainable
RoE of 25%, cost of equity of 13.0% and sustainable growth
rate of 8%. We believe the premium valuation over most
banks and NBFCs is justified by its higher profitability, a
dominant market share and robust asset quality.
Risks – Cyclical nature of the loan book, diversification into
unrelated businesses and regulatory changes are key
downside risks.
Valuation
Our priced target of Rs980 for Shriram Transport is based on 3.5x FY12E P/BV. We have used
sustainable RoE of 25%, cost of equity of 13% and sustainable growth rate of 8%. Over the past
five years, Shriram has traded at a high multiple of 3.9x P/BV one-year forward, low multiple of
1.1x and average multiple of 2.1x. We believe Shriram will likely trade at a premium to its fiveyear
average multiple and to other financial stocks on the back of its consistent earnings delivery,
high profitability and low NPLs.
Risks
Cyclical nature of commercial vehicle lending
Commercial vehicles are sensitive to business cycles both in terms of growth as well as servicing.
Diversification into unrelated businesses
Shriram Transport’s diversification into other business lines – construction equipment, tractors,
utility vehicles and 2 wheeler financing has been rapid, with the company’s ability to manage
profitability and risks in these lines yet untested.
Regulatory risk
The company actively uses loan assignment / securitisation as a source of funding due to the
capital it frees up and the lower cost of borrowing it offers by virtue of its priority status. Should
regulatory views on capital requirements on off-balance sheet items and priority status eligibility
change, cost of funds will increase.
Higher-than-expected credit losses
Higher-than-expected credit losses, particularly in non-CV business lines which Shriram
Transport has relatively lesser experience with, could impact our earnings estimates. For every
25bps increase in credit costs, earnings decline by 5%.
Company profile
Shriram Transport Financing Company is one of the largest asset financing NBFCs with AUM of
approximately Rs330bn. The company finances used and new commercial vehicles as well as
tractors, small utility vehicles, 3-wheelers, passenger commercial vehicles and construction
equipment through a pan-India presence of 487 branches.
Management team
Managing Director: R. Sridhar
Joined Shriram Group in 1985 and has been the Managing Director since September 2000 along
with holding directorship in other Shriram Group companies. He is a fellow member of the
Institute of Chartered Accountants of India.
CFO: Parag Sharma
Joined in 1992 and now heads the Finance function, a qualified Cost Accountant with over 18
years experience in finance.
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