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Shriram Transport Finance Co. Ltd. --Strong Long-Term Outlook, But Macro Uncertainty Drives Equal-weight
Launch coverage with EW rating and Rs820 target
(8% upside): STFC is well positioned, we believe, given
a robust long-term outlook for commercial vehicle (CV)
financing and high barriers to entry in its target segment.
However, macro uncertainty (outlook for growth and
elevated interest rates) could act as an overhang in the
near term – hence, we initiate coverage at Equal-weight.
STFC should deliver solid long-term earnings
progression: We forecast loan growth of 20% over the
next three years, underpinned by robust economic
growth, stable market share trends and continued
expansion of the used CV pool.
Near-term outlook contingent on macro: STFC’s
revenues are levered to the outlook for the Indian
economic growth cycle. Margins are near peak levels,
driven by robust demand conditions (allowing STFC to
pass on rate increases), increasing securitization (34%
of total AUM) and reduction in excess cash balances.
Valuation is reasonable, but risk-reward is evenly
balanced: STFC trades at 11.5x our F12e EPS / 2.9x
BV. We find this reasonable, given the 20% EPS growth
/ 28% ROE we expect STFC to deliver in F2012-13.
Why EW: We recognize the long-term potential of the
business – indeed, our base case (70% weight) implies
18% upside. However, a combination of rising rates,
tight liquidity, persistent inflation and mounting oil prices
has increased uncertainty about India’s growth outlook.
Against this backdrop, we assign a 20% probability to
our bear case, capping STFC’s potential returns. Within
our coverage, we prefer HDFC Bank, SBI and Axis to
STFC, as we believe these names are relatively better
positioned in this environment, given stronger liability
franchises and more diversified assets.
Valuation
We arrive at our price target of Rs820 using a probability-
weighted residual income model, in which we assign
weightings of 70% to the base case, 10% to the bull case and
20% to the bear case.
The 20% probability we assign to the bear case reflects the
potential for weaker macro and adverse regulatory changes to
hurt STFC’s revenue growth outlook. With inflationary
pressures continuing for longer (given recent trends), and
given STFC’s high reliance on bank funding (implying greater
vulnerability in the event of a change in regulations), we think a
20% probability that this scenario will materialize is warranted.
We assign a 10% probability to the bull case to factor in the
potential for a better than expected macro environment (i.e.,
inflationary pressures recede, and growth exceeds forecasts).
In this scenario, STFC’s revenues would benefit from both
better volume growth and stronger margins.
We value the stock over three phases – a five-year high-growth
period, a 10-year maturity period, followed by a terminal period.
We use a cost of equity of 14.2%, assuming a beta of 1.0, a
risk-free rate of 8.2% (current Indian 10-year government bond
yield), and a market risk premium of 6%.
Risks to Our Price Target
Upside: Strong industrial production/CV sales trends, more
benign interest rate trends, greater than expected operating
leverage.
Downside: Sharp slowdown in economic growth/CV sales,
growing competition in target segment, steep increase in short
rates, regulatory changes
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Shriram Transport Finance Co. Ltd. --Strong Long-Term Outlook, But Macro Uncertainty Drives Equal-weight
Launch coverage with EW rating and Rs820 target
(8% upside): STFC is well positioned, we believe, given
a robust long-term outlook for commercial vehicle (CV)
financing and high barriers to entry in its target segment.
However, macro uncertainty (outlook for growth and
elevated interest rates) could act as an overhang in the
near term – hence, we initiate coverage at Equal-weight.
STFC should deliver solid long-term earnings
progression: We forecast loan growth of 20% over the
next three years, underpinned by robust economic
growth, stable market share trends and continued
expansion of the used CV pool.
Near-term outlook contingent on macro: STFC’s
revenues are levered to the outlook for the Indian
economic growth cycle. Margins are near peak levels,
driven by robust demand conditions (allowing STFC to
pass on rate increases), increasing securitization (34%
of total AUM) and reduction in excess cash balances.
Valuation is reasonable, but risk-reward is evenly
balanced: STFC trades at 11.5x our F12e EPS / 2.9x
BV. We find this reasonable, given the 20% EPS growth
/ 28% ROE we expect STFC to deliver in F2012-13.
Why EW: We recognize the long-term potential of the
business – indeed, our base case (70% weight) implies
18% upside. However, a combination of rising rates,
tight liquidity, persistent inflation and mounting oil prices
has increased uncertainty about India’s growth outlook.
Against this backdrop, we assign a 20% probability to
our bear case, capping STFC’s potential returns. Within
our coverage, we prefer HDFC Bank, SBI and Axis to
STFC, as we believe these names are relatively better
positioned in this environment, given stronger liability
franchises and more diversified assets.
Valuation
We arrive at our price target of Rs820 using a probability-
weighted residual income model, in which we assign
weightings of 70% to the base case, 10% to the bull case and
20% to the bear case.
The 20% probability we assign to the bear case reflects the
potential for weaker macro and adverse regulatory changes to
hurt STFC’s revenue growth outlook. With inflationary
pressures continuing for longer (given recent trends), and
given STFC’s high reliance on bank funding (implying greater
vulnerability in the event of a change in regulations), we think a
20% probability that this scenario will materialize is warranted.
We assign a 10% probability to the bull case to factor in the
potential for a better than expected macro environment (i.e.,
inflationary pressures recede, and growth exceeds forecasts).
In this scenario, STFC’s revenues would benefit from both
better volume growth and stronger margins.
We value the stock over three phases – a five-year high-growth
period, a 10-year maturity period, followed by a terminal period.
We use a cost of equity of 14.2%, assuming a beta of 1.0, a
risk-free rate of 8.2% (current Indian 10-year government bond
yield), and a market risk premium of 6%.
Risks to Our Price Target
Upside: Strong industrial production/CV sales trends, more
benign interest rate trends, greater than expected operating
leverage.
Downside: Sharp slowdown in economic growth/CV sales,
growing competition in target segment, steep increase in short
rates, regulatory changes
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