Shriram Transport Finance _ Improving Visibility

Rationale for the Investment Ideas -  Shriram Transport Finance: Improving Visibility On Growth, Margin

We met the management of Shriram Transport Finance to get a better perspective on current performance and future outlook. In our opinion, the company has successfully dealt with concerns over slowing growth, decreasing margin, and asset quality issues. We now have better visibility on revenue growth and margin trends and believe SHTF will maintain a sustainable RoE of more than 20% with steady growth (~20% disbursement), higher NIM (~7.7%), and stable asset quality (GNPA at 2.9%). Maintain BUY.

Concerns Priced In
Incremental growth to remain stable: We expect the growth to remain stable (+20% disbursement) as growth in used CV (79% of AUM) to remain high due to (1) LCVs launched 5 years coming in the used CV market, (2) customers deferring purchases of new CVs and opting for used CVs, (3) higher resale value of used vehicles as new CV prices have increased, and (4) its Automalls providing larger customer database for marketing.

Margin to improve due to (1) higher share of used CVs and LCVs in incremental business, (2) ~30% of liabilities are floating, while loan assets are at fixed rate. The company will also benefit from higher securitization (mainly through PTC route) in H2. Management expects to securitize ~Rs 15 bn in Q3.

RoE to stabilize at above 20%: With improving margin, stable growth and no regulatory overhang on securitization, we believe the company will deliver RoE of more than 20% for next 2 years.

Increasing comfort, maintain BUY: We raise our target multiple from 1.8x to 2X FY14E ABV to factor in our rising comfort on growth, margin, and RoE. Maintain BUY with revised TP of Rs 760 (Rs 684 earlier). Potential upside triggers NOT factored in: Banking license and improvement in CV sales led by interest rate cuts.


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