Shriram Transport Finance Company Ltd - Initiating Coverage - Angel Broking

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Shriram Transport Finance Company (SHTF) is a NBFC with differentiated business model. The company pioneers in financing used commercial vehicles and had AUM of Rs. 95,306cr in FY18; it also focuses on small truck owners (having less than 5 trucks). SHTF has presence in almost all regions of the country with 1,213 branches.

Multiple AUM growth levers: CV and M&HCV sales grew 20% and 25.5% yoy, respectively in FY18. We expect AUM growth momentum to continue led by (1) macro-economic revival, vehicles typically change hands in three years in good economic environment and in five years in subdued economy, (2) business loans are gaining traction (Rs. 2,600cr portfolio in FY18). The company started with business loans from the South (Tamil Nadu), but is now expanding it to Karnataka and Andhra Pradesh, (3) ramping up of rural distribution, which led to 49% yoy growth in rural AUM to Rs. 3,100cr. It has opened incremental branches (217) in rural areas in FY18.

Stabilizing asset quality to lead to lower credit costs: SHTF recognized NPA on 180DPD basis till Q3FY16, but has gradually moved to 90DPD in Q4FY18. This has led to spike in GNPA (from 3.8% in FY15 to 9.15% in FY18) and credit cost (from 2.4 in FY15 to 3.8% in FY18). Credit cost over FY09-15 was in the range of 1.4-2.4% and due to a regulatory requirement; it reached 3.8% in Q4FY18. We expect credit cost to fall by 140bps over FY18-20E, which would drive RoA expansion.

Outlook & Valuation: We expect SHTF's AUM to grow at CAGR of 20% over FY18-20E led by stronger CV volume, macro recovery and improving rural market. The company's return ratios are at decade low levels (RoA/RoE - 1.9%/13% in FY18) primarily owing to higher credit cost, which we believe to normalize from FY19E onwards, which would propel RoA/RoE to 2.8%/20.7% in FY20E. At CMP, the stock is trading at 2.1x FY20E ABV and 9x FY20E EPS. We recommend a BUY on the stock with a target price of Rs. 1,760 (2.7x FY2020E ABV).

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.1301.55 as compared to the previous close of Rs. 1377.5. The total number of shares traded during the day was 43156 in over 2508 trades.

The stock hit an intraday high of Rs. 1377.05 and intraday low of 1273.6. The net turnover during the day was Rs. 56561897.

Source : Equity Bulls

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