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UBS Investment Research
Shriram Transport Finance
Gearing up for changes ahead
„ Event: management meet to discuss potential changes
We met Mr R. Sridhar, CEO to discuss the recent regulatory changes and possible
changes ahead. Management believes, looking at the spirit of the RBI gesture of
removing priority-sector status for on-balance sheet funding, it is illogical that the
status will continue for off-balance sheet funding. Management is working on a
contingency plan to offset the absence of securitisation. We expect growth to slow
down to the lower end of the 15-20% guidance in FY12 as the rates are impacting the
purchase decisions of truck operators. Healthy monsoons and agricultural production
could provide upside.
„ Impact: lowering estimates on lower growth, lower securitisation income
We lower our loan growth estimates to a 16% CAGR over FY12-13 from 19% earlier,
which is at the lower end of Shriram Transport Finance (SHTF) guidance. We lower
our securitisation income estimates by 8% in FY13, while maintaining FY12 estimates
due to accrued income (~Rs30bn). In case SHTF is able to execute its contingency
plans successfully to mitigate the impact, there could be upside risk to our estimates.
„ Action: maintain Buy with a lower PT of Rs800 (from Rs950 earlier)
We lower our price target 15% to Rs800 on account of the 3%/9%/7% cut in
FY12/13/14 EPS estimates. The impact of the decline in securitisation income will
show up with a lag; we have also raised our provisioning estimate in anticipation of
slowing macro. Our estimates imply average RoE of 25% and an EPS CAGR of 17% in
FY12-13.
„ Valuation: valuations offset regulatory overhang
Our price target, derived using a residual income model, implies 3x FY12E book. In
our view, current valuations offer an attractive entry point. We reiterate our Buy rating.
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
Shriram Transport Finance
Gearing up for changes ahead
„ Event: management meet to discuss potential changes
We met Mr R. Sridhar, CEO to discuss the recent regulatory changes and possible
changes ahead. Management believes, looking at the spirit of the RBI gesture of
removing priority-sector status for on-balance sheet funding, it is illogical that the
status will continue for off-balance sheet funding. Management is working on a
contingency plan to offset the absence of securitisation. We expect growth to slow
down to the lower end of the 15-20% guidance in FY12 as the rates are impacting the
purchase decisions of truck operators. Healthy monsoons and agricultural production
could provide upside.
„ Impact: lowering estimates on lower growth, lower securitisation income
We lower our loan growth estimates to a 16% CAGR over FY12-13 from 19% earlier,
which is at the lower end of Shriram Transport Finance (SHTF) guidance. We lower
our securitisation income estimates by 8% in FY13, while maintaining FY12 estimates
due to accrued income (~Rs30bn). In case SHTF is able to execute its contingency
plans successfully to mitigate the impact, there could be upside risk to our estimates.
„ Action: maintain Buy with a lower PT of Rs800 (from Rs950 earlier)
We lower our price target 15% to Rs800 on account of the 3%/9%/7% cut in
FY12/13/14 EPS estimates. The impact of the decline in securitisation income will
show up with a lag; we have also raised our provisioning estimate in anticipation of
slowing macro. Our estimates imply average RoE of 25% and an EPS CAGR of 17% in
FY12-13.
„ Valuation: valuations offset regulatory overhang
Our price target, derived using a residual income model, implies 3x FY12E book. In
our view, current valuations offer an attractive entry point. We reiterate our Buy rating.
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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