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Shriram Transport Finance
A nick here and a cut there
Initiate with a Neutral
We initiate coverage on Shriram Transport (SHTF) with a Neutral rating and a
TP of Rs600. A combination of slowing loan growth, lower margins and higher
provisioning is likely to generate unimpressive earnings growth and ROE
compression, we believe. Our earnings estimates are 7% and 15% below the
Bloomberg consensus for FY12 and FY13, respectively.
Growth - moderation ahoy!
A combination of a higher base, higher interest rates, higher fuel prices and
slowing demand is likely to slow disbursal growth, in our view. Demand for used
commercial vehicles should be relatively steady, we believe, while demand for
new vehicles should see a much more significant dip. We expect average AUM
growth of ~13% YoY for FY11-13 vs 24% in FY09-11.
Margins to be affected by costlier borrowing; lesser
securitisation, increased competition in new CVs
We expect NIMs to fall by 27bp in FY12 (from 8.68% in FY11) and by 13bp in
FY13. In the last two years, new CV loans have grown by 300bp more than old
CV loans, making up 24% of the loan book. New CVs have a much lower yield
and more competition from banks and other non banking financial companies
(NBFCs). We believe management would give up some margins for growth. We
think cost of funds should increase due to higher wholesale funding costs and a
lower proportion of securitisation funding. We believe interest rates are likely to
remain high at least through FY12, keeping borrowing costs high. A moderate
increase in cost of funds should also come from lower securitisation.
Regulatory headwinds – impact could be material, but far
from crippling
We believe the possibility of the RBI completely removing priority sector lending
status from loans bought by banks from SHTF (loans to small fleet operators) is
small. However, we think stricter due diligence by banks should slow sales
(called loan assignments). Accordingly, we have built in a reduction in the
absolute value of loans sold by SHTF in FY12 compared to FY11. A 20%
reduction in assignment would increase the cost of funds by 7bp and reduce Tier
I by 104bp. In our base case – ie, a moderate decline in securitised assets and a
deduction of credit enhancement from Capital – the FY12E Tier I and CAR ratios
of Shriram would be a comfortable 16% and 23%, respectively.
Asset quality – credit costs should move up
Strong demand has meant recovery has been good, while there is low incentive
to default. We do not expect the cycle to change in a hurry. However, credit
costs may have bottomed and appear likely to show a steady increase. We
expect credit costs to rise from 154bp in FY11 to 175bp in FY13.
Valuations not expensive, but risks remain
We initiate coverage with a Neutral rating. Our TP values the stock at 1.9x FY13
adjusted BVPS. There is a 78% correlation between CV sales and SHTF’s share
price. Thus a downside risk exists from a sharp slowdown in CV sales. Upside
risk could be continued strength in CV sales, while NIMs and asset quality are
maintained.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance
A nick here and a cut there
Initiate with a Neutral
We initiate coverage on Shriram Transport (SHTF) with a Neutral rating and a
TP of Rs600. A combination of slowing loan growth, lower margins and higher
provisioning is likely to generate unimpressive earnings growth and ROE
compression, we believe. Our earnings estimates are 7% and 15% below the
Bloomberg consensus for FY12 and FY13, respectively.
Growth - moderation ahoy!
A combination of a higher base, higher interest rates, higher fuel prices and
slowing demand is likely to slow disbursal growth, in our view. Demand for used
commercial vehicles should be relatively steady, we believe, while demand for
new vehicles should see a much more significant dip. We expect average AUM
growth of ~13% YoY for FY11-13 vs 24% in FY09-11.
Margins to be affected by costlier borrowing; lesser
securitisation, increased competition in new CVs
We expect NIMs to fall by 27bp in FY12 (from 8.68% in FY11) and by 13bp in
FY13. In the last two years, new CV loans have grown by 300bp more than old
CV loans, making up 24% of the loan book. New CVs have a much lower yield
and more competition from banks and other non banking financial companies
(NBFCs). We believe management would give up some margins for growth. We
think cost of funds should increase due to higher wholesale funding costs and a
lower proportion of securitisation funding. We believe interest rates are likely to
remain high at least through FY12, keeping borrowing costs high. A moderate
increase in cost of funds should also come from lower securitisation.
Regulatory headwinds – impact could be material, but far
from crippling
We believe the possibility of the RBI completely removing priority sector lending
status from loans bought by banks from SHTF (loans to small fleet operators) is
small. However, we think stricter due diligence by banks should slow sales
(called loan assignments). Accordingly, we have built in a reduction in the
absolute value of loans sold by SHTF in FY12 compared to FY11. A 20%
reduction in assignment would increase the cost of funds by 7bp and reduce Tier
I by 104bp. In our base case – ie, a moderate decline in securitised assets and a
deduction of credit enhancement from Capital – the FY12E Tier I and CAR ratios
of Shriram would be a comfortable 16% and 23%, respectively.
Asset quality – credit costs should move up
Strong demand has meant recovery has been good, while there is low incentive
to default. We do not expect the cycle to change in a hurry. However, credit
costs may have bottomed and appear likely to show a steady increase. We
expect credit costs to rise from 154bp in FY11 to 175bp in FY13.
Valuations not expensive, but risks remain
We initiate coverage with a Neutral rating. Our TP values the stock at 1.9x FY13
adjusted BVPS. There is a 78% correlation between CV sales and SHTF’s share
price. Thus a downside risk exists from a sharp slowdown in CV sales. Upside
risk could be continued strength in CV sales, while NIMs and asset quality are
maintained.
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