Add Shriram Transport Finance - Avendus

Competition hits growth and NIM, downgrade to Add

The increase in SHTF's loans in the Dec11 quarter moderated to 3% q-o-q, marginally below estimates. New CV disbursements declined for the third consecutive quarter, driving a 2% q-o-q decline in outstanding new CV loans. We lower our loan growth forecast for FY12 from 17% to 15% y-o-y, resulting in a 15% CAGR in loans over FY12-FY14. NIM contraction of 80-bp q-o-q was driven by higher funding costs and lower yields, despite higher securitization volumes. Higher competition from banks and smaller NBFCs impacted both growth and yields. We maintain our NIM forecasts at 13.5% for FY12, down from 16.5% in FY11, and to stabilize thereafter at 11% over FY13-FY14. We lower our earnings forecasts for FY12-FY14 by 3%. We lower our Dec12 TP to INR674. With an upside of 17%, we lower the rating to Add. Adverse regulatory guidelines and higher NPL provisions remain risk factors.

Higher competitive intensity hits new CV disbursements

The increase in SHTF's loans moderated to 3% q-o-q in the Dec11 quarter, marginally below estimates. New CV disbursements declined for the third consecutive quarter, driving a 2% q-o-q decline in outstanding new CV loans. Management attributed this to higher competitive intensity from banks and smaller NBFCs. Pre-owned CV disbursements increased 10% sequentially. The loan mix continues to tilt towards pre-owned vehicles, at 77% of total loans. We lower our loan growth forecast for FY12 from 17% to 15% y-o-y, resulting in a 15% CAGR in loans over FY12-FY14.

Sharp contraction in NIM driven by higher funding costs

NIM contraction of 80-bp q-o-q was driven by higher funding costs and lower yields, despite higher securitization volumes. Lower yields were driven by higher competition in the used and new CV segments. Securitization volumes increased from INR4.9bn in the Sep11 quarter to INR33bn in the Dec11 quarter. We forecast securitization volumes as a proportion of assets under management at 25% for FY12 and to decline thereafter to 15% over FY13-FY14. We maintain our NIM forecasts at 13.5% for FY12, down from 16.5% in FY11, and to stabilize thereafter at 11% over FY13-FY14.

Stable asset quality drives lower provisions

SHTF provided INR500mn towards NPLs arising out of Karnataka and Goa due to the mining issue in the Sep11 quarter. Balance exposure of cINR200mn was written off in the Dec11 quarter. Asset quality remained stable with GNPLs at 2.8% of loans, leading to lower provisions of INR1.9bn (INR2.3bn in the Sep11 quarter). Provision coverage stood at 86%, ahead of regulatory requirements.

Lower rating to Add with a revised Dec12TP of INR674

SHTF outperformed the Sensex by 21% since our previous update. We lower our earnings by 3% over FY12f-FY14f, due to lower loan growth in FY12f. Our Dec12 TP of INR674 is a weighted average, based on the DCF, P/E and P/B methods. With an upside of 17%, we lower our rating to Add. Adverse regulatory guidelines and higher NPLs are risk factors.

Source : Equity Bulls

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