31 October 2010

Shriram Transport - Loan growth moderates; margins surprise.:: Kotak Sec

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Shriram Transport (SHTF)
Banks/Financial Institutions
Loan growth moderates; margins surprise. Shriram Transport Finance (STFC)
reported PAT of Rs2.99 bn, up 44% yoy and 5% below estimates. Loan growth
(23% yoy), improvement in margins has driven earnings though this has been
somewhat offset by higher operating expenses. Asset quality performance was stable.
We believe that margins are currently at peak and will moderate down due to high bulk
borrowings rate. We revise earnings and retain our ADD rating with a price target of
Rs850 (Rs800 earlier).


Core earnings in line
Shriram Transport Finance (STFC) reported PAT of Rs2.99 bn, up 44% yoy but 5% below
estimates. Margins at 9.6% (as per KS calculations) improved yoy and qoq—this was the key
positive surprise (our estimate was 9.2%). Loan growth was somewhat lower at 23% yoy as
compared to 27% yoy reported in 1QFY11. Secular growth in business has pushed employee
expenses (up 74% yoy) and other operating expenses (up 64% yoy). The company has recognized
one-time expenses on its retail bonds during the quarter. After adjusting for the one-off item, PBT
was in line with our estimates.
Margins remain strong, will likely moderate
STFC’s NIM (NII/AUM) was strong at 9.6% as compared to 9.4% in 1QFY11. STFC’s borrowings
cost declined to 11.2% in 2QFY11 from 11.5% in 1QFY11, thereby driving margins and spreads.
Yield on assets also increased by about 20 bps as the share of used vehicles inched up to 77% of
STFC’s portfolio. We believe that rising bulk borrowing rates will reflect in STFC’s margins over the
next 1-2 quarters and the current quarter reflects a cyclical peak. Nevertheless, margins are
unlikely to contract significantly as the underlying demand remains strong and STFC retains the
ability to pass on interest rate hikes.

Loan growth moderates
STFC reported disbursements of Rs45 bn, up 26% yoy. Given the buoyancy in the CV industry,
share of new CVs increased to 24% of overall disbursements in 2QFY11 from 16% in 1QFY11.
Loan growth moderated to 23% yoy in 2QFY11 from 27% yoy in 1QFY11; this was below our
estimate (26%) as well. We expect loan growth to pick up to about 25-26% by March 2011E as
the traction in 4Q is typically stronger. We are modeling loan growth of 22-24% over FY2012-
13E.

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