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Shriram Transport Finance (SRTR.BO)
1Q12 Results: Environmental Pressures, Managed Well So Far
Reducing earnings 5% over FY12-13E, Maintain TP at Rs750, Hold — We are
reducing our earnings estimates by 5% over FY12-13E on lower asset growth (18%
now vs. 20% earlier) and higher credit costs, though partly offset by better than
expected NIMs. Our EVA-based target price remains unchanged at Rs750,
benchmarked now at 2.5x Sep’12 P/BV (2.75x 1yr Fwd PBV earlier). We believe higher
interest rates, possible NIM and credit costs will likely limit upsides; maintain Hold (2M).
We would get more constructive on the stock if there were an easing in liquidity,
interest rate cycle or on better growth, asset quality outlook.
1Q12 earnings up 20% yoy; in-line with estimates — Key earnings drivers were: a)
Surprise uptick in NIMs (+26bps qoq, 791bps now) as longer tenor, fixed rate funding
eased cost pressures; and b) Lower than expected operating expenses (lower wage
escalation and some shift to subsidiaries). However, this was partly offset by higher
credit costs (1.7%) during the quarter. We expect lower securitization, higher cost of
funds to remain near-term NIM overhangs. Credit costs also likely to remain elevated at
current levels. Overall, we expect some moderation in profitability, though gradual.
Asset growth healthy, sharp increase in NPLs, though expected to stabilize —
Shriram’s AUM growth was healthy at 22% yoy (some moderation expected),
securitization was low in 1Q12 (high regulatory uncertainty) and AUM mix remained
largely unchanged (25% new, 75% used vehicles). We expect new vehicle growth to
moderate incrementally (in-line with industry trends) and securitization to remain low
FY12. Asset quality was under some pressure - NPLs increased sharply by 14% qoq –
management says partly seasonal, should stabilize. Strong loan loss coverage (82%)
and capital adequacy (16.1% Tier 1) however cushion near-term NPL pressures.
Regulatory uncertainty remains, near-term stock pressures possible —
Regulatory risks remain high near term (pending guidelines on securitization, priority
sector classification and NBFCs) and along with moderation in growth and NIM outlook,
could lead to near-term underperformance of the stock.
Company description
Shriram Transport is the largest organized player in the pre-owned commercial
vehicle (CV) financing segment in India. It was started in 1979 by three
entrepreneurs and focuses on financing CVs. Subsequently it diversified into
financing 3-wheelers and tractors, and providing working capital, engine
replacement and tire loans to truck operators. Shriram has built a strong distribution
network with 494 branches, more than 16,000 employees and tie-ups with over 500
local financiers across the country, with a wide presence in South India.
Investment strategy
We rate Shriram Hold/Medium Risk. It has a unique business model, long track
record of operating profitably in a segment considered difficult by banks, healthy
asset quality, and an experienced and stable management team. Fundamentally,
the business has cyclical upside from: a) The turnaround in the Indian CV sales
cycle and its linkage to the strong industrial production cycle; b) Healthy demand for
financing of used vehicles as CVs financed during the last growth cycle (FY03-07)
come up for refinancing; c) An improving asset quality outlook for the industry as
economic activity has picked up smartly and prospects remain healthy; and d) A
robust return profile for Shriram, with ROEs of 23-26% over FY12-14E. However,
the stock appears close to fair value at 2.4x March 12 P/BV. While business
fundamentals remain consistent and healthy, we see limited upside to the stock
price from current levels.
Valuation
We value Shriram at Rs750 based on our EVA model, which captures the long-term
value of the business and is our standard valuation measure for CIRA India Banking
coverage. Our EVA model assumes: a) a risk-free rate of 8% (in line with secondary
market yields); b) longer-term loan loss provisions of 200bps given its higher asset
risk profile; c) loan spreads of 600bps due to its higher-yielding asset profile; and d)
long-term fee income growth of 10%. As a reference, we benchmark our fair value
off 2.5x 1Yr Fwd P/BV, in the middle of our target multiples for private-sector banks
(2-3.5x), based on this, the stock would be valued at Rs755. We believe Shriram
can trade towards the higher end of private banks during strong economic growth
and asset quality cycles due to its consistent and strong loan growth, superior ROE
profile and relatively niche lending segment, with high entry barriers for larger
players.
Risks
We rate Shriram Medium Risk, even as our quantitative risk-rating system, which
tracks 260-day historical share price volatility, suggests Low Risk. We believe
Shriram's strong loan growth in recent years, inherently higher asset risks and
sensitivity to the economic environment suggest a Medium Risk profile. Key upside
risks for the stock are: a) Continued easy liquidity / low interest rate environment; b)
Better-than-expected loan growth; and c) Availability of a banking licence. Key
downside risks that could cause the stock to trade below our target include: a) Asset
quality - good so far, but rapid pace of loan growth suggests credit costs can rise; b)
Wholesale funding - can hurt in a tight-liquidity scenario; c) Execution of the planned
fee income initiatives; d) Regulatory changes in the NBFC and transportation
sectors.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance (SRTR.BO)
1Q12 Results: Environmental Pressures, Managed Well So Far
Reducing earnings 5% over FY12-13E, Maintain TP at Rs750, Hold — We are
reducing our earnings estimates by 5% over FY12-13E on lower asset growth (18%
now vs. 20% earlier) and higher credit costs, though partly offset by better than
expected NIMs. Our EVA-based target price remains unchanged at Rs750,
benchmarked now at 2.5x Sep’12 P/BV (2.75x 1yr Fwd PBV earlier). We believe higher
interest rates, possible NIM and credit costs will likely limit upsides; maintain Hold (2M).
We would get more constructive on the stock if there were an easing in liquidity,
interest rate cycle or on better growth, asset quality outlook.
1Q12 earnings up 20% yoy; in-line with estimates — Key earnings drivers were: a)
Surprise uptick in NIMs (+26bps qoq, 791bps now) as longer tenor, fixed rate funding
eased cost pressures; and b) Lower than expected operating expenses (lower wage
escalation and some shift to subsidiaries). However, this was partly offset by higher
credit costs (1.7%) during the quarter. We expect lower securitization, higher cost of
funds to remain near-term NIM overhangs. Credit costs also likely to remain elevated at
current levels. Overall, we expect some moderation in profitability, though gradual.
Asset growth healthy, sharp increase in NPLs, though expected to stabilize —
Shriram’s AUM growth was healthy at 22% yoy (some moderation expected),
securitization was low in 1Q12 (high regulatory uncertainty) and AUM mix remained
largely unchanged (25% new, 75% used vehicles). We expect new vehicle growth to
moderate incrementally (in-line with industry trends) and securitization to remain low
FY12. Asset quality was under some pressure - NPLs increased sharply by 14% qoq –
management says partly seasonal, should stabilize. Strong loan loss coverage (82%)
and capital adequacy (16.1% Tier 1) however cushion near-term NPL pressures.
Regulatory uncertainty remains, near-term stock pressures possible —
Regulatory risks remain high near term (pending guidelines on securitization, priority
sector classification and NBFCs) and along with moderation in growth and NIM outlook,
could lead to near-term underperformance of the stock.
Company description
Shriram Transport is the largest organized player in the pre-owned commercial
vehicle (CV) financing segment in India. It was started in 1979 by three
entrepreneurs and focuses on financing CVs. Subsequently it diversified into
financing 3-wheelers and tractors, and providing working capital, engine
replacement and tire loans to truck operators. Shriram has built a strong distribution
network with 494 branches, more than 16,000 employees and tie-ups with over 500
local financiers across the country, with a wide presence in South India.
Investment strategy
We rate Shriram Hold/Medium Risk. It has a unique business model, long track
record of operating profitably in a segment considered difficult by banks, healthy
asset quality, and an experienced and stable management team. Fundamentally,
the business has cyclical upside from: a) The turnaround in the Indian CV sales
cycle and its linkage to the strong industrial production cycle; b) Healthy demand for
financing of used vehicles as CVs financed during the last growth cycle (FY03-07)
come up for refinancing; c) An improving asset quality outlook for the industry as
economic activity has picked up smartly and prospects remain healthy; and d) A
robust return profile for Shriram, with ROEs of 23-26% over FY12-14E. However,
the stock appears close to fair value at 2.4x March 12 P/BV. While business
fundamentals remain consistent and healthy, we see limited upside to the stock
price from current levels.
Valuation
We value Shriram at Rs750 based on our EVA model, which captures the long-term
value of the business and is our standard valuation measure for CIRA India Banking
coverage. Our EVA model assumes: a) a risk-free rate of 8% (in line with secondary
market yields); b) longer-term loan loss provisions of 200bps given its higher asset
risk profile; c) loan spreads of 600bps due to its higher-yielding asset profile; and d)
long-term fee income growth of 10%. As a reference, we benchmark our fair value
off 2.5x 1Yr Fwd P/BV, in the middle of our target multiples for private-sector banks
(2-3.5x), based on this, the stock would be valued at Rs755. We believe Shriram
can trade towards the higher end of private banks during strong economic growth
and asset quality cycles due to its consistent and strong loan growth, superior ROE
profile and relatively niche lending segment, with high entry barriers for larger
players.
Risks
We rate Shriram Medium Risk, even as our quantitative risk-rating system, which
tracks 260-day historical share price volatility, suggests Low Risk. We believe
Shriram's strong loan growth in recent years, inherently higher asset risks and
sensitivity to the economic environment suggest a Medium Risk profile. Key upside
risks for the stock are: a) Continued easy liquidity / low interest rate environment; b)
Better-than-expected loan growth; and c) Availability of a banking licence. Key
downside risks that could cause the stock to trade below our target include: a) Asset
quality - good so far, but rapid pace of loan growth suggests credit costs can rise; b)
Wholesale funding - can hurt in a tight-liquidity scenario; c) Execution of the planned
fee income initiatives; d) Regulatory changes in the NBFC and transportation
sectors.
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