Shriram Transport Finance- Living in interesting times :Macquarie Research,

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Shriram Transport Finance
Living in interesting times
Event
 We met SHTF management. We also did some branch checks to examine
operations on the ground (see page 2). A growth slowdown is evident and
regulations remain murky and could have a significant negative impact.
Impact
 Growth slowdown evident. Loan growth has slowed, especially in medium
size CVs. YTD sales growth of new medium sized CVs is 3.6% YoY. Medium
sized CVs comprise ~75% of SHTF’s total loan book. Management believes it
will achieve 15% YoY AUM growth for FY12E but is dependent on a strong
October, the festive season. We expect 11% FY12 growth.
 Not much assignment happening. This is mainly due to the discount rate
itself being high (cannot be below the base rate) compared to bond rates.
Also regulations are less than clear.
 Tightening the regulatory noose: Proposed regulatory changes could end
up hurting the company more.
A reduction in the NPL recognition period would lead to a jump in NPLs
and provisioning. P&L provisioning may increase although actual losses
may not happen. This could also impact operations negatively. The
company might become more selective in lending and so growth may
suffer. There may also be more volatility in quarterly reported NPLs.
Minimum Tier I capital is proposed to be increased to 12% from 7.5%.
While the Tier I is comfortable currently at ~17% (assuming continued
assignment), the leeway to increase leverage is reduced. Every 20%
reduction in assignment volumes reduces Tier I by 104bp, we estimate.
RBI is looking into the whole issue of priority sector loans for banks and
any recommendations may be ~3 months away.
Credit enhancement on assignments is not permitted now and could be a
significant negative but the banks are discussing this with the regulators.
Longer holding period of six months proposed could reduce the pool
available for assignment by ~10%.
 On new banking licence: Management has not decided on this as the
guidelines are not final. However, SHTF does have some things going for it,
namely, its ability to raise retail deposits and lending being primarily to the
priority sector. We believe it is too early to assign a value to this option.
Earnings and target price revision
 No change.
Price catalyst
 12-month price target: Rs600.00 based on a Gordon growth methodology.
 Catalyst: Adverse regulations
Action and recommendation
 Maintain Neutral.