Shriram Transport Finance - Stable operating performance but risks remain - Prabhudas Lilladher

SHTF's Q2FY13 PAT of Rs3.4bn was in line with expectations, with relatively stable asset quality and better-than-expected pick up in used/new CV disbursements. Operating performance seems to be stabilising now, with stable margins and credit costs. Though growth has surprised and valuations at 1.6x FY14 book is reasonable considering SHTF's used CV book facing lower competitive intensity, we are not as sanguine as the management on the CV cycle and there is a possible impact from impending regulations and hence, maintain our 'Accumulate' rating with a PT of Rs650/share.

- Strong operating quarter; stable asset quality: Q2FY13 was a strong quarter operationally, with ~30% YoY disbursement growth though of a low base. Not only has SHTF seen a pick in used CVs but even disbursements in new CVs surprisingly inched up. Margin improved ~25bps QoQ in line with expectations due to lower investment surplus and higher share of used CV business. Asset quality was stable with credit costs of ~200bps and management does not expect any material pick up in slippages over the next 2-3 quarters.

- Key Analyst meet highlights: (1) Pick-up in used CV disbursements was largely driven by LCVs as the LCV population is ageing and Shriram has not inched up LTVs (2) New CV pick-up has been due to upgradation by existing used CV users and SHTF is not competing with banks in financing new CVs (3) SHTF did Rs3.9bn of securitisation through PTC route and participating banks have not asked for tax indemnity (4) Shriram continues to withdraw from mining segment and has only little exposure left in Orissa (overall mining <2% of portfolio currently).

- Valuations reasonable but risks remain: Q2FY13 results surprised on AUM growth and current valuation at 1.6x FY14 book seem reasonable for a largely used CV book facing low competition among all retail asset classes. Diesel price hike has not caused a material impact on asset quality but slowdown is impacting freight availability and we remain cautious on CV cycle at the margin. Also, regulatory risks from faster NPA recognition remain (180 to 90 days).

Source : Equity Bulls

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