Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance (SRTR.BO)
4Q11 Results: Healthy Earnings Despite Sharp NIM Fall
4Q11 earnings up 29%, 6% above estimates — Shriram’s 4Q11 earnings were
healthy, rising 29% yoy and were led by strong asset growth, reduction in operating
expenses and credit costs. These were however, partly offset by a sharper than
expected decline in net interest margins (down 80bps qoq). Overall, we believe the
business outlook remains positive – consistent growth, stable margins and strong asset
quality being the key drivers of its superior return profile.
P&L: NIM decline key surprise — Shriram’s NIM decline of 80bps qoq (806bps now)
was much ahead of our estimates and attributable to – a) sharp 40bps rise in cost of
funds, and b) change in loan mix to more low yielding newer vehicles. Management
suggests NIMs sustainable at 8% levels, though a tighter liquidity environment can hurt
more. Operating costs reduced qoq as management curtailed variable expenses
despite significant employee additions. Credit costs were also lower as recoveries
improved meaningfully during the quarter (partly seasonal). We believe Shriram’s
relatively niche business positioning should help sustain its NIMs, and maintaining
credit costs will likely be key to earnings growth going forward.
Balance sheet: Growth robust, quality healthy — Shriram’s asset growth was
relatively strong at 24% yoy, expect some moderation in FY12 to around 20% levels
(cyclical demand for new vehicles, higher interest rates). Asset quality improved in 4Q
with greater focus on recoveries; while there could be some near-term strain, we
expect asset quality to remain largely stable medium term. Higher loan loss coverage
(85% now) also provides some earnings cushion. Shriram’s funding remains
wholesale; and while management is seeking longer tenor, fixed rate funding, it will
remain sensitive to higher interest rates/tighter liquidity environment.
Superior return profile, but near-term challenges persist — We believe Shriram’s
longer-term business and growth outlook remain intact. However, given near-term
challenges on margins, growth and its relatively high valuations (2.8x FY12E PBV), we
expect its stock price to be capped near current levels; maintain Hold
Shriram Transport Finance
Company description
Shriram Transport is the largest organized player in the pre-owned commercial
vehicle (CV) financing segment in India. It was started in 1979 by three
entrepreneurs and focuses on financing CVs. Subsequently it diversified into
financing 3-wheelers and tractors, and providing working capital, engine
replacement and tire loans to truck operators. Shriram has built a strong distribution
network with 484 branches, more than 14,000 employees and tie-ups with over 500
local financiers across the country, with a wide presence in South India.
Investment strategy
We rate Shriram Hold/Medium Risk. It has a unique business model, long track
record of operating profitably in a segment considered difficult by banks, healthy
asset quality, and an experienced and stable management team. Fundamentally,
the business has cyclical upside from: a) The turnaround in the Indian CV sales
cycle and its linkage to the strong industrial production cycle; b) Healthy demand for
financing of used vehicles as CVs financed during the last growth cycle (FY03-07)
come up for refinancing; c) An improving asset quality outlook for the industry as
economic activity has picked up smartly and prospects remain healthy; and d) A
robust return profile for Shriram, with ROEs of 23-26% over FY11-13E. However,
the stock has outperformed the market by a 73% in the past 12 months and
appears close to fair value at 3.1x 1Yr Fwd P/BV. While business fundamentals
remain consistent and healthy, we see limited upside to the stock price from current
levels.
Valuation
We value Shriram at Rs750 based on our EVA model, which captures the long-term
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 licence. 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)
4Q11 Results: Healthy Earnings Despite Sharp NIM Fall
4Q11 earnings up 29%, 6% above estimates — Shriram’s 4Q11 earnings were
healthy, rising 29% yoy and were led by strong asset growth, reduction in operating
expenses and credit costs. These were however, partly offset by a sharper than
expected decline in net interest margins (down 80bps qoq). Overall, we believe the
business outlook remains positive – consistent growth, stable margins and strong asset
quality being the key drivers of its superior return profile.
P&L: NIM decline key surprise — Shriram’s NIM decline of 80bps qoq (806bps now)
was much ahead of our estimates and attributable to – a) sharp 40bps rise in cost of
funds, and b) change in loan mix to more low yielding newer vehicles. Management
suggests NIMs sustainable at 8% levels, though a tighter liquidity environment can hurt
more. Operating costs reduced qoq as management curtailed variable expenses
despite significant employee additions. Credit costs were also lower as recoveries
improved meaningfully during the quarter (partly seasonal). We believe Shriram’s
relatively niche business positioning should help sustain its NIMs, and maintaining
credit costs will likely be key to earnings growth going forward.
Balance sheet: Growth robust, quality healthy — Shriram’s asset growth was
relatively strong at 24% yoy, expect some moderation in FY12 to around 20% levels
(cyclical demand for new vehicles, higher interest rates). Asset quality improved in 4Q
with greater focus on recoveries; while there could be some near-term strain, we
expect asset quality to remain largely stable medium term. Higher loan loss coverage
(85% now) also provides some earnings cushion. Shriram’s funding remains
wholesale; and while management is seeking longer tenor, fixed rate funding, it will
remain sensitive to higher interest rates/tighter liquidity environment.
Superior return profile, but near-term challenges persist — We believe Shriram’s
longer-term business and growth outlook remain intact. However, given near-term
challenges on margins, growth and its relatively high valuations (2.8x FY12E PBV), we
expect its stock price to be capped near current levels; maintain Hold
Shriram Transport Finance
Company description
Shriram Transport is the largest organized player in the pre-owned commercial
vehicle (CV) financing segment in India. It was started in 1979 by three
entrepreneurs and focuses on financing CVs. Subsequently it diversified into
financing 3-wheelers and tractors, and providing working capital, engine
replacement and tire loans to truck operators. Shriram has built a strong distribution
network with 484 branches, more than 14,000 employees and tie-ups with over 500
local financiers across the country, with a wide presence in South India.
Investment strategy
We rate Shriram Hold/Medium Risk. It has a unique business model, long track
record of operating profitably in a segment considered difficult by banks, healthy
asset quality, and an experienced and stable management team. Fundamentally,
the business has cyclical upside from: a) The turnaround in the Indian CV sales
cycle and its linkage to the strong industrial production cycle; b) Healthy demand for
financing of used vehicles as CVs financed during the last growth cycle (FY03-07)
come up for refinancing; c) An improving asset quality outlook for the industry as
economic activity has picked up smartly and prospects remain healthy; and d) A
robust return profile for Shriram, with ROEs of 23-26% over FY11-13E. However,
the stock has outperformed the market by a 73% in the past 12 months and
appears close to fair value at 3.1x 1Yr Fwd P/BV. While business fundamentals
remain consistent and healthy, we see limited upside to the stock price from current
levels.
Valuation
We value Shriram at Rs750 based on our EVA model, which captures the long-term
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 licence. 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.
No comments:
Post a Comment