Shriram Transport Finance- Mixed quarter; headwinds remain :: Macquarie Research

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Shriram Transport Finance
Mixed quarter; headwinds remain
Event
 Shriram Transport reported 1Q12 PAT, 10% ahead of our expectations but in
line with Bloomberg consensus. The beat was mainly due to chunky
securitisation income. Significant headwinds for the stock remain however.
We maintain our Neutral rating and TP of Rs600.
Impact
 Growth slows down. Disbursements were up 20% YoY compared to 35%
YoY for FY11. New commercial vehicle disbursals grew much faster than old.
Total AUMs grew by 22%YoY with the key driver again being the new CV
financing. This we believe makes the AUM growth more susceptible to higher
interest rates/ lower demand because new CV loan growth is more
susceptible to these factors. While disbursements may pick up in 2H12,
management did not rule out the possibility of a material slowdown in growth if
macro conditions remain adverse.
 Margin expansion this quarter, however funding cost pressures remain.
The company booked securitisation income of Rs5.5bn up 47% YoY. This
helped NIM to go up 25bp QoQ to 7.9%. Another reason for the NIM increase
was also lower borrowings done this quarter – total borrowings declined 3%
QoQ. Cost of fund pressure remains however and management believes the
current cost of borrowing of 10.4-10.5% can go up further by ~25-50bp post
the recent rate hike by RBI. It is prepared to trade off some of the margins for
loan growth and thinks (securitisation remaining) the 1Q12 NIM can compress
by ~40bp by end of FY12.
 NPLs and provisioning up. After about six quarters of stable NPLs, gross
NPLs increased by a sizeable 14% QoQ. This resulted in provisions also
being up 31% QoQ. Management thought there may be some seasonality
aspect to this increase. While this may be the case, we believe that credit
costs are likely to show an upward trajectory after having bottomed out in
FY11 and should be a drag on profitability.
 No clarity regarding regulations yet. Management does not have clarity on
the exact timing and/ or content of possible regulations regarding (i) priority
sector lending, (ii) securitisation/ assignment rules (iii) broader NBFC sector
regulations. The hit from regulations could come both on the cost of funds as
well as capital. We believe Shriram would be sufficiently capitalised in case of
moderation in securitisation volumes and if credit enhancements for loan
assignments are deducted from capital. Its current Tier I is healthy at 16% and
total CAR is 23%.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs600.00 based on a Gordon growth methodology.
 Catalyst: Compression in margins, slowdown in growth
Action and recommendation
 Maintain Neutral with a TP of Rs600.