Shriram Transport - Structural issues; Downgrade to sell - Anand Rathi

- Shriram Transport improved AUM growth to more than 20% AUM growth in 9MFY14. This was largely led by increasing rural penetration and the change in consumer preferences to used CVs (between 3- 5yr-old vehicles).

- However ,the higher growth however was offset by lower NIM, down 94bps yoy to 6.7%, on the higher cost of funds and lower securitization income.

- Shriram's productivity has been deteriorating with costto-income increasing by 400 bps yoy to 25% . Increasing rural penetration would further cap any productivity gains.

- Asset quality has deteriorated, with GNPA at 3.6% of advances, the highest in the last three years. A weak macro-economic environment is likely to keep credit costs (200bps on AUM) higher than in the past.

- At our Mar'15 price target of Rs. 655, the stock would trade at 1.6x FY15e and 1.4x FY16e BV. We expect Shriram to continue facing structural challenges. Downgrade the stock to a Sell. Our target is based on the two-stage DDM (CoE: 15.7%; beta: 1.1; Rf: 8%).

Risks: A higher-than-expected NIM could lead to higher income.

Source : Equity Bulls

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