Neutral on Shriram Transport Finance as margins likely to remain stable

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SummaryFrom our meeting with the management of Shriram Transport Finance (SHTF) we gathered that they are not in favour of converting the company into a bank.

From our meeting with the management of Shriram Transport Finance (SHTF) we gathered that they are not in favour of converting the company into a bank. Shriram Transport Finance promoters might seek an exemption from RBI for the truck financing business by converting this business into lease/hire-purchase model. Thus, the truck financing business will remain as it is and the promoters (Shriram Capital) will apply for a banking licence separately.

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SHTF has close to 25% market share in the used CV segment and, therefore, it is difficult to grow at a rate much faster than that of industry. The management guided that based on average GDP forecast of 6-6.5% over next three years, AUM growth is likely to be around 15% over FY13-16E.

The management said asset quality might not improve in next 1-2 quarters due to pressure on freight rate. However, the company is confident of maintaining gross NPAs in the range of 2.8-3.1% and credit cost at 1.8-2%.

SHTF is unlikely to be the biggest beneficiary of falling wholesale cost of funds. Banks are unlikely to cut lending rates. Therefore, cost of borrowings from banks is unlikely to reduce in near term. However, liquidity in the market has improved. The management states that margins for FY14E should remain largely flat over FY13.

We maintain ‘neutral’ on the company with a target price of R705.

Macquarie

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