Smooth ride ahead -- Shriram Transport Finance :: HDFC Securities

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Smooth ride ahead
Shriram Transport Finance (SHTF) being a proxy play
on the cyclical CV industry was one of the worst hit
during the last couple of years. Its growth, margins &
asset quality were severally impacted with elevated
interest rates & diesel prices and declining income
generation capabilities of its borrowers (with lower
volumes, falling freight & rising diesel prices).
With multi layered tailwinds i.e. improving macros,
falling interest rates, better earnings profile for its
borrowers, we believe SHTF is now at the inflextion
point and one of the preferred play on the CV cycle
revival. We expect SHTF’s RoAs to inch back to +3%
(from ~2.7% in FY15E) led by improving growth
trajectory, NIM expansion & decline in credit cost.
Further, the niche business segment (used CVs),
higher market share and well cushioned B/S (CRAR :
22% & PCR : 79%) provides comfort. Maintain BUY
with a revised TP of Rs 1,248 (2.3xFY17E ABV).
 RoA to inch back to 3% : With the gradual improvement
in macros coupled with reduction in interest rates and
better health of its borrowers, we expect SHTF to report
a sharp improvement in RoA to +3% from the current
levels of ~2.7%. Improvement in RoA is expected to be
driven by higher growth trajectory, NIM improvement
and decline in credit costs.
 NIM improvement imminent : As 56% of the borrowings
are floating in nature and are expected to be repriced in
FY16, SHTF’s CoF would decline. Further, with a fixed
nature of its asset book, we expect NIMs to improve by
~80bps (FY14-17E) to 7.1%. Receding asset quality
worries should provide additional cushion to NIMs.
 Asset Quality to gradually improve : Over the last 2.5
years, SHTF’s GNPA increased ~2.4x to Rs 16.8bn
(3.74%) led by deceleration in the economy. SHTF’s
credit cost too jumped from ~Rs2bn/qtr (2%) in FY12 to
Rs 3/qtr (2.3%) in 1HFY15, as the co. maintained its
coverage ratio at ~79%. We believe gradual
improvement in macros and fall in diesel prices augurs
well for SHTF’s borrowers and thus recede asset quality
woes for SHTF. We factor GNPA of 3.8-3.5% over FY15-
17E. We further believe that with a higher coverage
ratio, SHTF is one of the better placed CV financiers for a
gradual transmission to 90 day NPA recognition.
 Growth to pick up in FY16 : With pick up in macros,
favorable base and +25% market share in used vehicles,
we believe SHTF is well placed to deliver ~16% AUM
CAGR over FY15-17E. Our interaction with Mgmt further
indicates that this pick up would be driven by upgrades
(borrowers shifting towards newer vehicles), multigrowth
(borrowers adding vehicles) and replacement
demand.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010716