Retain ‘buy’ on Shriram Transport Finance (SHTF). We view the recent price correction as a good opportunity to accumulate the stock. We expect ROEs to move back to 17-18% by FY17f and remain positive on the commercial vehicle cycle. That, coupled with improving margins, should drive SHTF’s ROEs.
While we have been positive on SHTF, we did not benchmark multiples to the last cycle (2.5-3.0x book), given long-term growth constraints. In our view, the valuation at 1.8x book is now reasonable (vs the valuation of 2.25x book in March). Our target price of R1,250 is based on 2.2x March 2017 book after adjusting for R36 of subsidiary valuation (equipment finance + Auto Mall).
SHTF’s share price has corrected ~20% in two months, driven by unseasonal rains in end-March and a green tribunal order banning 10-year diesel vehicles in the NCR region. The impact of unseasonal rains should be transitory and the sharp under-performance last week discounts more than a worst-case outcome of an immediate ban given SHTF’s limited presence in NCR.
Our interaction with IFTRT suggests that the green tribunal can pass orders on the pollution level, but cannot age-restrict the entry of vehicles.
Transport operators believe that the implementation of tighter norms could impact small operators (SHTF’s main segment), but the limited presence of the company in North India will likely limit the impact.