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UBS Investment Research
Key Call: Shriram Transport Finance
Securitization maintained as PSL. For now
„ Event: RBI clarifies on securitized loans
RBI has clarified that priority sector status has been removed only on on-balance
sheet assets and not on off-balance sheet assets (securitized) as of now. SHTF has
~20% on-balance sheet funding from banks which would be impacted as a result of
priority sector status being taken away. As per the management the interest rate on
these loans is market linked and not concessional and does not expect any impact
as a result of this.
„ Impact: Stress testing our assumptions; risk is 10% EPS cut
Assuming nil securitization going forward (we don’t expect this to happen) and
assuming SHTF does not pass on the cost increase, we estimate impact on
profitability of around 10% and RoE to decline by 250 bps to 24%. Securitization
is ~150-200 bps cheaper cost of funds which if discontinued will lead to NIM
decline of 50-60 bps. Tier-1 ratio would also come down by 200 bps to 13%.
„ Action: Attractive despite regulatory overhang
We estimate securitized assets proportion to decline from current level of 45% to
33% in FY12 and 23% in FY13 and build in 20 bps decline in NIMs as a result. In
our view until clarity emerges on future issuances of securitization, overhang could
remain; however once the dust settles valuation should reflect the high sustainable
RoE s of 22-24%. We find valuations attractive at 2.5x FY12E book and 2x FY13E.
„ Valuation: Maintain BUY, PT Rs950
We derive our PT using residual income model. Our PT implies 3.5xFY12E book
Conference call takeaways
SHTF hosted a conference call today and some of the key highlights are listed
below.
Q With the policy rate hikes cost of funds will witness an increase however
impact on NIMs to be minimal given high proportion of fixed rate funding
(80%)
Q RBI has clarified that direct lending to NBFC from banks not to be a part of
priority sector
Q SHTF borrows from banks under two source of funds: on balance sheet and
securitization
Q On-balance sheet funding happens on purely commercial terms- no cost
concession due to priority sector; rates are market oriented; No cost
differential
Q Securitization has still been maintained as a priority sector
Q RBI has formed a committee to review regulations regarding NBFCs which
will take a call on securitization; SHTF will be presenting its case to the
panel next week
Q Final guidelines on securitization are expected to be posted June 2011
Q Yesterday’s RBI circular will not have any impact on SHTF NIMs and
profitability
Q On-balance sheet borrowings from banks form ~20% of funding
Q Have securitized aggressively as was looking at securitization as a short term
window; over next 12 months off-balance sheet assets to come down to 25%
-30% of AUM from current level of 45%
Q Shriram Transport Finance
Shriram Transport Finance Corporation Ltd, established in 1979 and listed in
June 1999 on the NSE, is part of the Chennai-based Shriram Group. The Group
has a 41% stake in Shriram. The company is engaged in financing new and
second-hand commercial vehicles, commercial passenger vehicles, three
wheelers, tractors and construction equipment. Shriram Transport Finance has
pan-India coverage with a network of 484 branches and 60 strategic business
units. It raised Rs5.8bn through a Qualified Institutional Placement in January
2010.
Q Statement of Risk
We believe a slowdown in economic growth, industrial production and
consequent decline in the freight market would impact borrowers’ ability to
repay, in addition to impacting the company’s growth outlook. A change in
securitisation guidelines is also a risk, in our view
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Key Call: Shriram Transport Finance
Securitization maintained as PSL. For now
„ Event: RBI clarifies on securitized loans
RBI has clarified that priority sector status has been removed only on on-balance
sheet assets and not on off-balance sheet assets (securitized) as of now. SHTF has
~20% on-balance sheet funding from banks which would be impacted as a result of
priority sector status being taken away. As per the management the interest rate on
these loans is market linked and not concessional and does not expect any impact
as a result of this.
„ Impact: Stress testing our assumptions; risk is 10% EPS cut
Assuming nil securitization going forward (we don’t expect this to happen) and
assuming SHTF does not pass on the cost increase, we estimate impact on
profitability of around 10% and RoE to decline by 250 bps to 24%. Securitization
is ~150-200 bps cheaper cost of funds which if discontinued will lead to NIM
decline of 50-60 bps. Tier-1 ratio would also come down by 200 bps to 13%.
„ Action: Attractive despite regulatory overhang
We estimate securitized assets proportion to decline from current level of 45% to
33% in FY12 and 23% in FY13 and build in 20 bps decline in NIMs as a result. In
our view until clarity emerges on future issuances of securitization, overhang could
remain; however once the dust settles valuation should reflect the high sustainable
RoE s of 22-24%. We find valuations attractive at 2.5x FY12E book and 2x FY13E.
„ Valuation: Maintain BUY, PT Rs950
We derive our PT using residual income model. Our PT implies 3.5xFY12E book
Conference call takeaways
SHTF hosted a conference call today and some of the key highlights are listed
below.
Q With the policy rate hikes cost of funds will witness an increase however
impact on NIMs to be minimal given high proportion of fixed rate funding
(80%)
Q RBI has clarified that direct lending to NBFC from banks not to be a part of
priority sector
Q SHTF borrows from banks under two source of funds: on balance sheet and
securitization
Q On-balance sheet funding happens on purely commercial terms- no cost
concession due to priority sector; rates are market oriented; No cost
differential
Q Securitization has still been maintained as a priority sector
Q RBI has formed a committee to review regulations regarding NBFCs which
will take a call on securitization; SHTF will be presenting its case to the
panel next week
Q Final guidelines on securitization are expected to be posted June 2011
Q Yesterday’s RBI circular will not have any impact on SHTF NIMs and
profitability
Q On-balance sheet borrowings from banks form ~20% of funding
Q Have securitized aggressively as was looking at securitization as a short term
window; over next 12 months off-balance sheet assets to come down to 25%
-30% of AUM from current level of 45%
Q Shriram Transport Finance
Shriram Transport Finance Corporation Ltd, established in 1979 and listed in
June 1999 on the NSE, is part of the Chennai-based Shriram Group. The Group
has a 41% stake in Shriram. The company is engaged in financing new and
second-hand commercial vehicles, commercial passenger vehicles, three
wheelers, tractors and construction equipment. Shriram Transport Finance has
pan-India coverage with a network of 484 branches and 60 strategic business
units. It raised Rs5.8bn through a Qualified Institutional Placement in January
2010.
Q Statement of Risk
We believe a slowdown in economic growth, industrial production and
consequent decline in the freight market would impact borrowers’ ability to
repay, in addition to impacting the company’s growth outlook. A change in
securitisation guidelines is also a risk, in our view
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