Shriram Transport Finance Company

Fresh investments can be considered in the stock of Shriram Transport Finance Company (STFC), which is among the leading asset financing (commercial vehicle financing) NBFCs in India.

The company delivered robust earnings growth (57 per cent for FY-09) despite the slowdown in new truck demand thanks to its significant presence in pre-owned truck financing.

At the current market price of Rs 288, STFC trades at 10 times its historic earnings and 2.5 times its FY-09 book value. At these valuations, it trades at a premium to smaller asset financing companies such as SREI Infra, Mahindra Finance and Sundaram Finance.

Better-than-industry spreads (7.17 per cent) and profitability ratios (ROE 30 per cent, ROA 2.7 per cent), presence in under-penetrated pre-owned truck segment and few listed competitors, country-wide presence are key positives for the company.

STFC claims a 20-25 per cent market share in the pre-owned truck finance market. In addition, STFC has a market share of 7 per cent in the new truck market.

Loan book mix

Almost three-fourth of the total assets under management (loan book and securitized assets put together) is contributed by pre-owned trucks and the rest 25 per cent by new trucks. The book for STFC has grown at 53 per cent CAGR in the period 2005-2008.

However, STFC did not mange to grow at same rate in FY-09 owing to the slowdown in various sectors; the loan book growth rate was still robust at 20 per cent in FY-09. Almost 23 per cent of assets have been securitised.

The securitised portfolio is bought by banks and institutions to meet their priority sector lending targets. Offloading a part of portfolio will allow them to lend more to the sector.

To fund its lending, the borrowing profile of STFI has shifted from retail deposits to bank/institution borrowings over the past four years.

The share of retail borrowing has come down from 73 per cent in FY05 to 15.7 per cent in FY-09 which helped in reducing the cost of funds.
Margins

The net interest margin of STFC fell from 7.77 per cent to 7.16 per cent in a year. However, the margins are high relative to most other FIs and appear sustainable due to high yields on pre-owned vehicles. Falling interest rates may help improve the margins for STFC, as it may source funds at lower rate (benefiting from a reasonable credit rating), while yields may not fall significantly due to high risk attached to the truck segment.
Financials

Net profit of STFC grew at 57 per cent for 2008-09 on the back of high growth in net interest income growth (35 per cent) and income from securitisation (104 per cent). Fall in net interest income can be attributed to contraction in margins. Employee expenses and other operating expenses have grown at more than 50 per cent pulling down the operating profit growth. Gross NPA/advances rose 1.6 per cent in FY-08 to 2.1 per cent in FY-09. STFC’s provisions for bad debts grew by 24 per cent, helping the company bring down its NNPA proportion to 0.8 per cent from 0.9 per cent in FY-08, despite increase in gross NPA.

The company’s loan-to-value of 65 per cent, offers comfort. It also gets internal valuation done for the truck, which will help it ascertain the true value of the truck. A strong countrywide network aids recovery.
Outlook

Apart from truck financing, the company has forayed into tractor financing, small CV and passenger CV financing, providing possible diversification. The RBI’s recent circular making it easier for lenders to repossess assets in case of default will benefit the company significantly.

In the current slowdown, STFC is going slow on loan disbursals. The disbursement remained flat during the year. The company has Rs 5,300 crore in the form of cash and bank balances, which it is yet to lend; this may be a reflection of cautious lending. It also plans to raise another Rs 1,000 crore in the form of NCDs, taking care of liquidity for the time being.
Risks

The higher spreads that STFC enjoys reflects the higher risk profile attached to its borrowers. That suggests that higher slippages are possible if the slowdown persists. Issues such as over capacity, fall in export/import freight and industrial product carriers have not affected STFC for now as most of its clients (the older trucks) carry es0sential commodities, but given the classification of assets as NPAs only after 180 days past due, the true picture would be known only in the coming quarters.