Shriram Transport -Buy- Prabhudas Lilladher
Shriram Transport Finance Corporation (STFC), which already has Rs25 billion of construction equipment based assets, is looking at this segment as a strong additional growth driver.
It has formed a 100% subsidiary for the same and expects its book size to reach Rs75 billion in about three years. It’s lending model will be about 50:50 New:Used and 50:50 bankable customers v/s un-bankable customers (against nearly 90% un-bankable customers in CV financing). The company expects the yields in this business to be about 100-150bps lower than existing, but still expects the return on assets (RoA) to be similar due to expected lower non-performing assets (NPAs). Competition is essentially from OEM’s finance subsidiaries (e.g. L&T Finance).
Against Rs22 million in FY09, STFC has already generated fee income of Rs230 million in 9MFY10 (expected to go up to Rs300m in FY10). With its ‘truck bazaar’ covering 180 locations and going ‘daily’ (from ‘monthly’ currently) with the help of e-kiosks, this income is expected to rise even higher in FY11. Further, with three ‘AutoMall’ outlets starting in April and going to 55 by end of FY11, the total fee income for the year is expected to reach Rs100 crore.
With the overall CV cycle looking up, we believe STFC’s GNPAs have peaked at 2.4%. While the CV financing book is expected to grow about 15% net in FY10, we expect the growth to increase to about 18-20% in FY11 and FY12 each.
With the recent equity raising (Rs5.84bn @ Rs500.8/share), STFC’s CAR stands at over 20%. With higher securitization and issuing longer dated fixed rate corporate bonds (to reduce ALM mismatch), STFC’s balance sheet position is strong.
With its core used CV financing cycle looking up, additional opportunities in construction equipment financing, fast rising fee income and a loaded capital position, STFC is in an enviable position. At 2.4x FY11 and 1.9x FY12 BV, it’s also inexpensive. BUY to target Rs650 in 12-months.
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