Shriram Transport Finance Co. Limited - Adding new dimensions to growth - Antique

Shriram Transport Finance's Q4FY13 reported earnings growth of 15% YoY was driven by stronger than expected AUM growth of 23.5% YoY. Margins on AUM declined 30bps sequentially, led by large quarter-end securitization and higher disbursements to the 3 to 5 year segment. Although asset quality witnessed some deterioration as GNPAs increased 30bps QoQ to 3.2%, the management maintains the incremental GNPAs are largely on account of cashflow mismatches and stemmed from vehicle loans originated in FY12, where the LTV cushion is high.

We believe the stress levels are reflective of the tough macro environment and may not deteriorate meaningfully from here. Credit costs at 250bps and 290bps for FY14E and FY15E respectively adequately capture the earnings risk from any possible asset quality deterioration and a possible migration to 90 day NPA recognition. Growth could stay meaningfully strong given the multiple avenues - the increasing size of used CVs market, Shriram's entry in the 3 to 5 year vehicle and opportunities in its rural centers. Shriram Transport offers the best bet in the CV space, both in terms of asset quality and growth opportunity. Earnings growth of 17% CAGR over FY13-15E would drive average RoEs of 20%+. Maintain BUY with twelve month price target of Rs858 per share.

Stress at peak levels, material deterioration unlikely

Stress levels continued to remain elevated as GNPAs increased 12% or 30bps sequentially and currently stand at 3.2%. The management has shown its preference for recognizing NPA rather than repossessing and selling the trucks as it believes that a large part of the incremental stress is cash-flow related and could be resolved in subsequent quarters. Although GNPAs may rise in the interim, we believe credit costs will remain contained at 50-60bps per (excluding impact of 90 day migration) given that most of Shriram's exposure is to used CV space, which is performing relatively well. In any case, the company holds provisions to the tune of 77% of GNPAs vs. regulatory requirement of 38%.

New initiatives aid strong AUM growth

AUM growth was strong at 23.5% YoY, aided by traction in the rural and the 3 to 5 year vehicle space. Although at the nascent stage, these segments already contribute ~2% and ~5% of the Company's total AUMs and are expected to strong at high double digit rates over FY14. The focus continues to remain on the old CVs, which constitute 80% of the total AUMs (79% in Q3FY13). Shriram's dominance in the used CV space will allow it to capture the increasing used CV space and maintain healthy growth rates.

Margins decline on lower yields, could remain under near term pressure

The company securitized ~Rs53.6bn towards the end of March while ~Rs26bn of securitized book devolved in Q4FY13, resulting in sharp decline in NIMs on securitization. Off-book AUMs now constitute 37% of the total AUMs (33% in Q3FY13). Aggressive growth in 3 to 5 year vehicles also pressurized yields and offset the benefit of lower borrowing costs. Given the managements guidance of aggressive growth in 3 to 5 year vehicles, we believe some of the yield decline may persist. Margins however will remain stable on the back of declining borrowing costs.

Source : Equity Bulls

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