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Shriram Transport Finance — Dark clouds clear;
Securitization on for now; Buy
Company Update
The dark clouds clear, securitization stays for now
Over the weekend, RBI has issued a master circular in context of priority sector
guidelines, within which it has also indicated securitization shall continue if the
asset was originated as priority sector. There were apprehensions that RBI may
withdraw the benefits of securitization availed by NBFCs, including STFC.
However, this circular clears that ambiguity as of now. STFC said it will continue
to get lower funding cost benefit owing to securitization. We however believe that
this does not rule out any incremental RBI action on securitization from the
constituted committee that is looking into securitization and PSL by banks /
NBFCs.
1Q earnings growth at ~15-16%, but growth (volume) strong
While 1QFY12 earnings growth is likely to be only +15-16% yoy owing to high
base of same period last year, we believe that business growth to be strong, with
AUM growth of +20% yoy and margins between +7.9-8.0%. Asset quality is also
likely to hold-up, with gross NPLs at 2.6% (flat qoq).
FY12/13 EPS growth at +24%; Risk-return attractive; Buy
We remain positive on STFC owing to its unique business model and skill sets in
NBFC domain leading to above average return ratios (RoAs of +4.5% and RoEs
of +27%). We estimate earnings growth of +24% for FY12/13 to be driven by +19-
20% volume growth and margins sustaining at +7.5-8.0%. Asset quality to still
hold-up with provision cover at +85-90% in FY12/13. STFC has been a big
underperformer (+16% vs. the Sensex) over last 3 months owing to overhang of
securitization, but risk-return remains is still very attractive (stock trades at 1.9x
FY13 book; RoEs of +27%), hence, reiterate Buy and PO of Rs900.
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