Chennai-based commercial vehicle financier, Shriram Transport Finance Company will try to raise Rs 1,000 crore from the debt capital market, through a secured, redeemable non-convertible debenture (NCD) issue. The issue is for Rs 500 crore with an option to retain over-subscription of up to Rs 500 crore by issuing additional NCD’s.

Here, analysts and fund managers reckon that the issue is an attractive one considering the management quality, the credit rating and the 11.50% yield to maturity. Already, the banking sector has started reducing deposit rates and they are expected to remain low for some more time.

This issue has been rated ‘CARE AA+’ by CARE and ‘AA (ind)’ by Fitch. The rating of CARE indicates stability and timely servicing of debt obligations and very low credit risk and the rating of Fitch indicates high safety, respectively.

STFC is a part of the Shriram conglomerate, which has a presence in various financial services like commercial vehicle financing business, consumer finance, life and general insurance, stock broking, chit funds and distribution of financial products.

The company is one of the largest asset financing NBFCs in India with a niche presence in financing pre-owned trucks and small truck owners. And this could be a cause for concern as collections could be an issue, especially if the economy does not recover as expected.

Industry

The commercial vehicle finance industry was estimated to be Rs 520 crore in 2001. Post that, many private players entered this market space and NBFC’s such as Tata Finance, Sundaram Finance, Citcorp Finance and Cholamandalam accounted for about 34% of the market. Banks like HDFC, ICICL and Kotak accounted for 57% of the market space and SBI, which increased interest in the sector in 2003-04 accounted for the remaining 9%.

In 2005-06 the market had grown to Rs 3,030 crore and the new commercial vehicles finance market contributed to Rs 1,960 crore and the old market Rs 1,070 crore.

Company and finances

Shriram Transport Finance Corporation is one of the largest assets financing NBFC’s and they specialise in financing pre-owned trucks and small truck owners (STO’s)

The company has a track record of over 30 years in this business and deal in financing passenger commercial vehicles, multi-utility vehicles, three wheelers, tractors and construction equipment, making them an integral part of the domestic roads logistics industry. As on March 31, 2009 the company had 479 branches with tie-ups with 500 private financers.

STFC has demonstrated consistent growth in its business and profitability with its total income and profit after tax growing from Rs 34,568.84 lakh and Rs 4,932.38 lakh in FY 2004-05 to Rs 3,73,112.97 lakh and Rs 61,240.21 lakh in FY 2008-09 at a CAGR of 81.25% and 87.71%, respectively. A 35.67% growth in its net profit in the quarter ended March 31, 2009 at Rs 153.8 crore, compared with Rs 111.8 crore during the same quarter last year is a healthy sign given the current times and the total income for the quarter stood at Rs 995 crore as against Rs 768 crore in the corresponding quarter last year, while the total expenditure stood at Rs 242.7 crore as against Rs 208.7 crore in the same quarter last year. The AUM has grown by a compounded annual growth rate (CAGR) of 68.01% from Rs 2,92,159.35 lakh in FY 2005 to Rs 23,28,110.65 lakh in FY 2009. The assets under management included Rs 17,92,397.14 lakh, assets securitised/assigned of Rs 5,31,092.91 lakh and a portfolio managed by the company of Rs 4,620.60 lakh.

The funds will be used for various financing and investing activities and will not be used for lending purposes, which is a normal business activity. The company’s finances more or less speak for themselves and whilst the company deals with what one would feel is a risky business, R Shridhar, managing director, Shriram Transport Finance explains, “Small truck owners paid 30-40% of the money upfront and hence the default rates were generally low. Around 60-70% of the customers paid on time and the balance took six more months than their schedule.”

Instrument highlights

n The face value is Rs 1,000 per NCD and tradable lot size of 1 NCD.

n The company offers five different investment options. A yield on redemption of NCDs upto 11.50% per annum can be gotten based on the option an investor wishes to go for.

n Also, an additional interest of 0.25% per annum for senior citizens in relation to options I and II NCDs is available.

The minimum application size is Rs 10,000 and in multiples of Rs 1,000 thereafter. Interest on application money at the rate of 8% p.a. to be paid from the date of realisation of the cheque or three days from the date of receipt of the application, whichever is later, up to one day prior to the deemed date of allotment.

n Interest on refund at 2.50% per annum on valid applications will be paid. Issuance of NCDs to Non-Resident Indians (NRIs) not to exceed an aggregate of Rs 10,000 lakh

n There is no TDS deductible.

n And lastly, the allotment of the instrument will be on a first come first serve basis.