Shriram Transport Finance Company - Dominance to rescue - Antique

The commercial vehicle space has seen a protracted slowdown since early FY13. Recently published rating agency data and interaction with vehicle auctioneers suggest a clear trend that new CVs (sold in FY13) have contributed to the bulk of incremental stress in 1HFY14 and delinquencies in new CVs have reached levels seen in the used CV segment. The is very much in sync with expectation as highlighted in our previous report - 'Solace in heterogeneity' - dated Apr-13. We reiterate that Shriram Transport Finance's presence in the used CV space makes its best placed to navigate the current cycle and remain less susceptible to growth and asset quality issues.

The macro outlook for 2HFY14 is better on account of favourable monsoon and festive season. STFC's dominance in the used CV segment will enable AUM CAGR of 16% over FY14-16e, despite a pronounced slowdown in MHVCs. We believe a large part of the growth margin adjustment has played out and earnings CAGR at 13% will drive RoEs at 18% over FY14-16w. We maintain our Buy rating with a target price of INR719 per share, which discounts FY15e book by 1.6x. A further macro deterioration remains the key risk to our call.

Used CVs continue to drive growth

Given the sharp de-growth in new CV sales across all categories, used CVs continue to remain the key growth driver. Disbursements towards old CVs constituted 93% of 2QFY14 disbursements. STFC's rural initiatives, deepening of the auto-mall ecosystem, and foray into newer vehicles will enable 15-16% AUM CAGR over FY14-16 despite uncertain outlook for the manufacturing and mining sector.

Most of the growth-margin trade-off has already played out, recovery likely in 2HFY14 STFC's calculated margins declined 20bps sequentially to 6.1%, partly led by higher borrowing costs in 2QFY14 and on account of high cash levels. It has initiated a 50bps lending rate hike in 2QFY14 across product categories and expects this to aid margin recover in 2H. Declining yields from lower vintage vehicles could be offset by growth from rural centers over the next few years. We expect NIMs to stabilise at 6.6-6.8% levels over FY14-16e.

Exposure to used CVs make STFC the best bet in the vehicle space

We have consistently highlighted that old CVs is the best way to play the current asset quality cycle as well as subsequent recovery. STFC's dominance here will ensure multiple opportunities. We have already lowered our margin estimates to account for a shift to lower vintage vehicles and built in elevated credit costs. Earnings CAGR of 12.6% over FY14-16e will drive RoEs of 18%. We maintain our Buy rating with a price target of INR718 per share.

Source : Equity Bulls

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