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Shriram Transport Finance (SRTR.BO)
Neutral Equity Research
Regulatory risks magnify challenges
What's changed
Shriram Transport (SRTR) share price has corrected 25% since Apr 25 (recent
peak for banks/NBFCs) which we believe reflected market concerns on
regulatory changes/risks and NIM compression. Recent regulatory changes:
(1) In the Monetary Policy, RBI has removed ‘bank loans to NBFCs’ as priority
sector (‘PS’) from April 1, 2011 (detailed guidelines awaited). (2) CRAR increased
to 15% from 12% for NBFCs from FY12. Potential regulatory risks: (1) RBI has
a committee re-examining the PS classification guidelines. If banks can’t buy
NBFC assets to meet PS norms, the regulatory arbitrage benefiting SRTR would
end. (2) If draft securitization guidelines (of Jun ‘10) are implemented (requiring
min. holding period and/or loan retention), then securitization (60%/ 51% of
disbursements in FY10/FY11) would be muted at least for a year, in our view.
Implications
We cut our FY12E/FY13E EPS by 9.6%/20.6% on building NIM pressure, lower
securitization. (1) NIMs: Mgmt. indicated 20% of total borrowings (c.Rs40bn) are
bank loans classified as PS by banks. We are factoring an additional 40bp rise in
cost of funds (assuming a 200bp benefit), which lowers our FY12E-FY13E EPS
by 2.4%-4.4%. Given already high yields and continued rise in rates by banks/
RBI, we think SRTR could find it difficult to pass these through. We are assuming
a decline in calculated NIMs of 160bp from 3Q peak levels to 8.6%. (2)
Securitization: Mgmt. indicated that 70% of advances are > 1 year old, enabling
a continued sell-down. We have factored in 60%/38% lower securitization in
FY12E/13E vs. our estimates, lowering PAT by 7.4%-17%.
Valuation
We lower our 12-m CAMELOT TP to Rs680 from Rs810 factoring in lower 2nd stage
RoE. Post correction ( FY12E: 2.3X P/BV, 10XP/E), we are Neutral given regulatory
risks and better risk-reward in stocks like Yes Bank, IndusInd Bank, PNB and BOB.
Key risks
Downside risks: (1) Implementation of stringent securitization guidelines (2)
Economic slowdown hurts growth. Upside risks- fee income initiatives.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance (SRTR.BO)
Neutral Equity Research
Regulatory risks magnify challenges
What's changed
Shriram Transport (SRTR) share price has corrected 25% since Apr 25 (recent
peak for banks/NBFCs) which we believe reflected market concerns on
regulatory changes/risks and NIM compression. Recent regulatory changes:
(1) In the Monetary Policy, RBI has removed ‘bank loans to NBFCs’ as priority
sector (‘PS’) from April 1, 2011 (detailed guidelines awaited). (2) CRAR increased
to 15% from 12% for NBFCs from FY12. Potential regulatory risks: (1) RBI has
a committee re-examining the PS classification guidelines. If banks can’t buy
NBFC assets to meet PS norms, the regulatory arbitrage benefiting SRTR would
end. (2) If draft securitization guidelines (of Jun ‘10) are implemented (requiring
min. holding period and/or loan retention), then securitization (60%/ 51% of
disbursements in FY10/FY11) would be muted at least for a year, in our view.
Implications
We cut our FY12E/FY13E EPS by 9.6%/20.6% on building NIM pressure, lower
securitization. (1) NIMs: Mgmt. indicated 20% of total borrowings (c.Rs40bn) are
bank loans classified as PS by banks. We are factoring an additional 40bp rise in
cost of funds (assuming a 200bp benefit), which lowers our FY12E-FY13E EPS
by 2.4%-4.4%. Given already high yields and continued rise in rates by banks/
RBI, we think SRTR could find it difficult to pass these through. We are assuming
a decline in calculated NIMs of 160bp from 3Q peak levels to 8.6%. (2)
Securitization: Mgmt. indicated that 70% of advances are > 1 year old, enabling
a continued sell-down. We have factored in 60%/38% lower securitization in
FY12E/13E vs. our estimates, lowering PAT by 7.4%-17%.
Valuation
We lower our 12-m CAMELOT TP to Rs680 from Rs810 factoring in lower 2nd stage
RoE. Post correction ( FY12E: 2.3X P/BV, 10XP/E), we are Neutral given regulatory
risks and better risk-reward in stocks like Yes Bank, IndusInd Bank, PNB and BOB.
Key risks
Downside risks: (1) Implementation of stringent securitization guidelines (2)
Economic slowdown hurts growth. Upside risks- fee income initiatives.
INVESTMENT LIST MEMBERSHIP
Neutral
Coverage View: Neutral
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