Shriram Transport Finance Company: Accumulate with a revised target price | Target price revised | Fundamental Analysis |

The domestic CV industry witnessed slow off take in current fiscal on back of pre-buying in the industry in Q4FY17 and deferment of new vehicle purchases by fleet operators because of impending GST implementation from July 2017. Limited availability of BS-IV compliant vehicles due to uncertainty related to implementation of new emission norms further aggravated tepid sales. However, since July 2017, the industry has regained its momentum driven by pent-up demand post GST, healthy replacement-led demand especially in tractor trailer segment owing to stricter implementation of Central Motor Vehicles Rules (CMVR) and pick-up in construction and mining activity, triggering demand for tipper trucks.

ICRA posits that the domestic CV industry is on a structural uptrend and expects it to register a growth of 6-7% in FY18. Within the CV industry, it foresees the M&HCV (truck) segment to grow by 2-4% aided by increased thrust on infrastructure and rural sectors in the last Budget and stricter implementation of regulatory norms especially related to vehicle length (for certain applications) and overloading norms. ICRA believes LCVs will continue to benefit from replacement-led demand stimulated by National Green Tribunal (NGT’s) thrust on phasing out old diesel vehicles along with government’s proposed vehicle modernization program which will help it grow by 14-16% in FY18. 

Recovery in the domestic CV sales in the second quarter of current fiscal (LCV and MHCV segments grew by 21.5% and 20.4% respectively) after a sluggish first quarter aided AUM growth of Shriram by 13.5% in H1FY18 (y-o-y) to Rs 85462.57 crs ($13076.5m) as against Rs 75322.58 crs ($11299.6m) in H1FY17. The growth was driven by 26.5% rise in off book portfolio on back of hefty securitization done by the company which increased by 29.4% y-o-y and 11.1% growth in on-books portfolio.

Disbursements witnessed a sharp uptick of 26.3% (y-o-y) last quarter to Rs 12377 crs ($1925.1m) from Rs 9800 crs ($1463.5m) after a few consecutive quarters of negative to single digit growth rate (down by 22.5% in Q3FY17 to growth of only 1.5% in the first quarter of current fiscal). It was mainly led by 19.3% growth in used CVs and 155.6% growth in new CVs.

Cost to income ratio declined by 260 bps (y-o-y) and stood at 20.5% in H1FY18. De-growth of 2.3% in interest expenses helped NII to grow by 19.2% and margins to improve by 36 bps (y-o-y) to 7.5% in the first half of the current fiscal. Government’s commitment to double the farmers’ income in five years along with boost to the rural and infrastructure sector in the Budget 2017 will power STFC’s prospects – we expect its net interest income to grow at a CAGR of 16.3% in the next two years. 

Its asset quality continued to remain under pressure and gross NPA rose sharply by 148 bps to 8.1% in H1FY18 from 6.6% in H1FY17. Net NPA ratio also increased to 2.5% from 2.0% in the same period last year. Shifting to 90 days NPA recognition norms by the end of FY18 should add another 4.6 bps to gross NPA and increase it to 8.31% in FY18.

The stock currently trades at 2.3x FY18e BV (18.3x FY18e EPS of Rs 68.20 and 2.0x FY19e BV (14.9x FY19e EPS of Rs 84.0). Pick up in the CV industry following a brief period of disruption caused by transition to GST has started showing signs of stabilization and is on a recovery trend and Shriram is all set to deliver notable performance in the second half of the current fiscal with expected increase in earnings of 22.3% and 23.2% with AUM growth of 16.0% and 15.5% in FY18 and FY19 respectively. Underpenetrated market for used truck financing, with 60-65% of the market dominated by private financers who charge high interest rates, holds strong growth potential. On balance, we recommend ‘accumulate’ rating on the stock with a target price of Rs 1475 (previous target Rs 1096) based on 2.4x FY19e BV for a period of 6-9 months.

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