Shriram Transport Finance margins to remain stable: ICICI Securities

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Published: January 10, 2018 3:31:43 AM

Shriram Transport Finance (STFC) is the pioneer and largest player in the used CV financing space and is a part of the 'Shriram' conglomerate that has a significant presence in varied financial services.

Shriram Transport Finance, STFC, Shriram Transport Finance market rating, market rating of Shriram Transport FinanceSTFC was incorporated in 1979 and started financing the much neglected small truck owners.

Shriram Transport Finance (STFC) is the pioneer and largest player in the used CV financing space and is a part of the ‘Shriram’ conglomerate that has a significant presence in varied financial services. STFC was incorporated in 1979 and started financing the much neglected small truck owners. Currently, it has an AUM of Rs 85,463 crore, growing 13.2% y-o-y (87% is derived from used vehicles) as on Q2FY18. It has a network of 1,035 branches with 1.62 million customers. For FY17 & H1FY18, PAT was at Rs 1,257 crore & Rs 927 crore (21% y-o-y), respectively. CV industry has seen a significant slowdown in the past (five years till FY17) led by infrastructure slowdown, lower capex which has seen signs of reversal with CV sales turning to positive growth. Government measures like Bharatmala, shift to BS IV, good monsoons seen to help faster revival of demand. Currently, 47% of STFC AUM is towards HCV, 20.5% to M&LCV, 24 % to passenger vehicles & tractors is 4.18%.

Going ahead, the focus would continue on used trucks of five to 10 years age wherein, as per STFC, has potential of Rs 1, 35,000 crore financing opportunity due to replacement & new demand. The opportunity and capital adequacy of 16.94% would allow healthy AUM growth of 20% in FY19E. Management has guided to reach AUM of R1,10,000 crore by FY19E from R85,463 crore as on September 2017.

STFC had seen an NPA surge with demonetisation and regulatory shift to 120 days from 180 days (GNPA>8%). We expect FY18 to factor in most pains with NNPA ratio peaking at 2.6% and decline to sub 2% by FY20E. Margins are expected to remain stable at 7.2%- 7.5% with improving double digit CV growth and increase in share of new vehicles.

STFC was trading at subdued valuations due to the CV sector slowdown and resultant NPA concerns. With the recent pick-up in financing and merger with IDFC group being called off, the stock has seen a positive re-rating and is currently close to 2.6x trailing BV. RoE and RoA is set to improve to 15-17% and ~2.5%, respectively by FY19E.

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