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Shriram Transport Finance (SRTR.BO)
Steady Business, But Macro Challenges
Reducing Target Price to Rs660, maintain Hold — We reduce our EVA-based
target price for Shriram to Rs660, benchmarked to 2.25x 1Yr Fwd P/BV (2.5x
earlier). Our lower target multiple factors in increasing growth headwinds in the
commercial vehicle financing segment and possible rise in credit costs.
Moreover, there are likely regulatory changes to asset quality recognition and
provisioning, which could also impact earnings negatively.
Fundamentally stable, but macro challenges — We believe Shriram Transport
has a strong niche business, with high margins and healthy risk-return profile.
However, there are environment pressures - high interest rates/ inflation, slower
economic growth and likely asset quality pressures. While these have been well
managed thus far, lower growth, higher funding costs and credit charges will
remain near-term earnings overhangs.
Quant View: Unattractive — Shriram Transport currently lies in the Unattractive
quadrant of our Value-Momentum map with weak momentum and weak value
scores.
Shriram Transport currently lies in the Unattractive quadrant of our Value-
Momentum map with weak momentum and weak value scores. The stock has
moved from the Contrarian quadrant to the Unattractive quadrant in the past 3
months indicating a weakening in the valuation scores. Compared to its peers in the
Insurance & Other Financials sector, Shriram Transport fares worse on the valuation
metric but better on the momentum metric. On the other hand, compared to its
peers in its home market of India, Shriram Transport fares better on the valuation
metric and on the momentum metric.
From a macro perspective, Shriram Transport Finance has a low beta to the region,
so can be expected to hold its own given a decline in the regional market. It is also
likely to benefit from weaker US Dollar.
Shriram Transport Finance
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 (2M). 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. However,
there are near term growth and earnings challenges from: a) Expected slowdown in
the Indian CV sales cycle and its linkage to the strong industrial production cycle; b)
Tighter (draft) regulatory norms for NPL recognition and provisioning, which could
lead to near term earnings impact; and c) Expected increase in NPLs due to
slowdown in capex cycle, leading to slower economic activity near term.
Fundamentally, however, Shriram’s return profile should remain robust with
expected ROEs of 23-26% over FY12-14E. However, the stock appears close to fair
value at 2.0x 1yr Fwd P/BV and we see limited upside from current levels.
Valuation
We value Shriram at Rs660 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 300bps given its higher asset
risk profile; c) loan spreads of 730bps due to its higher-yielding asset profile; and d)
long-term fee income growth of 12%. As a reference, we benchmark our fair value
off 2.2x 1Yr Fwd P/BV (Sep'12), at the lower end our target multiples for privatesector
banks (2.0-3.5x); based on this, the stock would be valued at Rs664. We
believe Shriram can trade at higher multiples during strong economic growth and
asset quality cycles, though this will be challenging in the current environment.
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) Possibility of a new banking license. Key
downside risks that could cause the stock to trade below our target include: a) Asset
quality - good so far, but slower economic activity, 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)
Steady Business, But Macro Challenges
Reducing Target Price to Rs660, maintain Hold — We reduce our EVA-based
target price for Shriram to Rs660, benchmarked to 2.25x 1Yr Fwd P/BV (2.5x
earlier). Our lower target multiple factors in increasing growth headwinds in the
commercial vehicle financing segment and possible rise in credit costs.
Moreover, there are likely regulatory changes to asset quality recognition and
provisioning, which could also impact earnings negatively.
Fundamentally stable, but macro challenges — We believe Shriram Transport
has a strong niche business, with high margins and healthy risk-return profile.
However, there are environment pressures - high interest rates/ inflation, slower
economic growth and likely asset quality pressures. While these have been well
managed thus far, lower growth, higher funding costs and credit charges will
remain near-term earnings overhangs.
Quant View: Unattractive — Shriram Transport currently lies in the Unattractive
quadrant of our Value-Momentum map with weak momentum and weak value
scores.
Shriram Transport currently lies in the Unattractive quadrant of our Value-
Momentum map with weak momentum and weak value scores. The stock has
moved from the Contrarian quadrant to the Unattractive quadrant in the past 3
months indicating a weakening in the valuation scores. Compared to its peers in the
Insurance & Other Financials sector, Shriram Transport fares worse on the valuation
metric but better on the momentum metric. On the other hand, compared to its
peers in its home market of India, Shriram Transport fares better on the valuation
metric and on the momentum metric.
From a macro perspective, Shriram Transport Finance has a low beta to the region,
so can be expected to hold its own given a decline in the regional market. It is also
likely to benefit from weaker US Dollar.
Shriram Transport Finance
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 (2M). 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. However,
there are near term growth and earnings challenges from: a) Expected slowdown in
the Indian CV sales cycle and its linkage to the strong industrial production cycle; b)
Tighter (draft) regulatory norms for NPL recognition and provisioning, which could
lead to near term earnings impact; and c) Expected increase in NPLs due to
slowdown in capex cycle, leading to slower economic activity near term.
Fundamentally, however, Shriram’s return profile should remain robust with
expected ROEs of 23-26% over FY12-14E. However, the stock appears close to fair
value at 2.0x 1yr Fwd P/BV and we see limited upside from current levels.
Valuation
We value Shriram at Rs660 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 300bps given its higher asset
risk profile; c) loan spreads of 730bps due to its higher-yielding asset profile; and d)
long-term fee income growth of 12%. As a reference, we benchmark our fair value
off 2.2x 1Yr Fwd P/BV (Sep'12), at the lower end our target multiples for privatesector
banks (2.0-3.5x); based on this, the stock would be valued at Rs664. We
believe Shriram can trade at higher multiples during strong economic growth and
asset quality cycles, though this will be challenging in the current environment.
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) Possibility of a new banking license. Key
downside risks that could cause the stock to trade below our target include: a) Asset
quality - good so far, but slower economic activity, 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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