JM Financial buy reccomendation on Shriram Transport Finance Company

The broking house has given 'BUY' recommendation on the stock with the target price of Rs. 1200.

Few excerpts of the report:

Shriram Transport Finance (SHTF) continued to witness asset quality pressure as gross slippages remained elevated at 6.7%. AUM growth improved to c.11% driven by healthy disbursements growth (c.18%). Given SHTF's unique business model and expertise in pre-owned CV financing, we believe it will be a significant beneficiary of CV revival over FY15-18E driven by pick-up in growth, improving margins and normalization in credit costs. Merger of equipment finance subsidiary should give more control to the management. We believe market concerns on its subsidiary are exaggerated and expect impact on its core business to be limited.

- AUM growth improved to 11% in FY15: Disbursements growth improved (up 17.5% YoY vs 9.5% YoY in FY14) as new CV disbursements picked up (c.25% yoy) while demand for used CV remained steady at 17% YoY. Consequently, AUM growth improved by c.400bps to 11.3% in FY15. Growth should pick further for SHTF driven by IIP recovery, revival in CV cycle and SHTF's continued investment in its distribution network. We build in moderate recovery in AUM growth (16% CAGR) over FY15-18E.

- Slippages remained at elevated levels with gross slippage of 6.65% (6.7% in FY15), while net slippages improved marginally to 3.7% (4.1% in FY14) and hence, GNPL improved by 13bps to 3.7%. Credit costs increased by 24% as coverage ratio improved by 100bps to 80%. We factor credit costs of c.200bps over FY15-18E vs 10 year average of 170bps.

- Funding mix improves; reliance on securitization coming down: During FY11-14, SHTF relied heavily on securitisation as funding tool for liability management. However, this year SHTF did not do much securitization due to lower demand and unattractive yields. Consequently, off b/s AUM proportion declined to 17% in FY15 (vs 31% in FY14). Fixed deposits proportion increased to 12.1% (vs 6.4% in FY14) while moderation in rates in FY15 helped SHTF lower its funding costs by 64bps to 10.7%

- RoAUM has bottomed; expect 18% CAGR in earnings over FY15-18E: We believe return on AUM has bottomed out at 2.2% (lowest since FY07) and expect it to recover by 20bps driven by improvement in margins and normalization of credit costs. We forecast earnings CAGR of c.18% over FY15- 18E and improving return ratios with RoAUM of 2.4% and ROE of 16% by FY18E. We value SHTF at 2.3x Mar'17 BV, implying Mar'16 TP of `1,200.

- Merger of Shriram Equipment Finance (SEF) subsidiary to bring more control and ensure focus on recoveries: Equipment finance subsidiary reported `2.2bn loss in FY15 due to significant deterioration in asset quality. SHTF has announced merger of SEF with SHTF in order to bring more control and focus on recoveries in the near term. We believe market concerns on SHTF equipment finance subsidiary are exaggerated and expect impact on SHTF core business to be limited.

- Focus on Rural branches continued: During FY15, SHTF penetrated deeper into rural areas by opening 147 new rural centers, taking the total rural centers to 776. In the last 3 years, it has added more than 1,000 branches (including rural branches). (Exhibit 8).

- ALM profile: Proportion of borrowings maturing in less than 1 year stood at 28% in FY15 while average tenure of borrowings stood at 1.54 years. Proportion of loans maturing in less than 1 year stood at 40% in FY15 while average tenure of loans stood at 1.33 years.

- Concentration risk for loans and exposures is minimal: Concentration risk for advances and exposures was minimal with top 20 borrowers at 1.6% while top 20 exposures also at similar level implying minimal concentration risk. For NPLs, four largest accounts formed just 3.8% of total NPLs.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.938.85 as compared to the previous close of Rs. 930.55. The total number of shares traded during the day was 17197 in over 1265 trades.

The stock hit an intraday high of Rs. 947.9 and intraday low of 930.65. The net turnover during the day was Rs. 16148319.

Source : Equity Bulls

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