Investments in branch expansion a key positive:
With improved visibility of demand, SHTF opened 203 branches in 9MFY18, taking the total branch count to 1,121 branches. The number of branches opened in the past three quarters is higher than the number opened in the preceding nine quarters. Also, given that a significant portion of these branches were opened in rural areas, the impact on opex was not meaningful – opex grew only 14% in 9MFY18 against 18% AUM growth and 20% NII growth. As the branches mature, their productivity should improve.
Decline in credit costs to drive improvement in RoE:
The 10-year average credit cost for SHTF over FY06-15 is 1.7%. In FY16 and FY17, credit costs jumped to 3.1-3.2%. However, this was largely due to provisions made to maintain high PCR during NPL migration. If SHTF were to continue to record GNPL ratio at 180dpd and maintain 80% PCR, credit costs would have been 2.1- 2.2% in both FY16 and FY17. While the management has guided 2.5% credit cost in FY19, we believe there is scope for further reduction as credit costs normalise. We, however, conservatively model 2.5% credit cost in FY19 and thereafter. Sharp reduction in credit costs and improvement in spreads should drive improvement in RoA (on AUM)/RoE from 2.1%/14.7% in FY18 to 2.7%/19% in FY20.
Beginning of the up cycle:
Industry M&HCV domestic sales declined sharply from a peak of 348,000 units in FY12 to 200,000 units in FY14 due to various factors including the mining ban. While sales have recovered since then, FY18E sales are still 6% below the FY12 peak. As a result, the pool of ‘vehicles sold in the past five years’ has been largely static in the past three years. The pool of vehicles is calculated as the cumulative sale of M&HCV vehicles over the prior 5-10 years. For example, the pool for FY18 is the sum of vehicles sold during FY08-13. While this has been a cause of concern for investors, we note that despite the pool being largely static over FY16-18E, disbursements have grown at 11-12% CAGR over the same time period. This is due to continued shift towards higher tonnage vehicles as well as price increases over time.
Niche business segment:
The Company has unique business model backed by established relationships over past 38 years. The pre-owned CV segment has always been largely unorganized. However, the company has been engaged in the initiative to corporatize this untapped segment. The pre-owned commercial vehicles segment is the key segment of presence for the company ever since its inception. The company has established its leadership in the segment and targets the largest market segment of pre-owned commercial vehicles – those vehicles ageing between 5-12 years, accounting for 43% of the total market volume.
BS IV norms will drive demand:
The government’s initiative to have all vehicles complies with the BS-VI standard will drive demand for the new vehicle in near future and will ultimately drive the finance requirement. So the company will gain a lot from this positive step.
India’s financial services sector is diversified, comprising of entities such as commercial banks, co-operatives, insurance companies, pension funds, mutual funds, non-banking financial companies and other various entities. As on December 31, 2016, the total managed retail credit (including off-balance sheet book) of NBFCs stood at ~Rs. 5.6 trillion, growing year-on-year by about 17.5% in 9M FY 2017 (as against 19.5% in FY 2016 and 14.8% in FY 2015). The total NBFC retail credit including SME exposure stood at about Rs. 6.2 trillion as on December 31, 2016, growing year-on-year by about 19.0% in 9M FY 2017 (as against 21.2% in FY 2016 and 16.2% in FY 2015).
Shriram Transport Finance (SHTF) established in 1979, is one of the largest asset financing NBFCs in India with asset under management of INR788b as of March 2017. SHTF's primary focus is on financing pre-owned commercial vehicles. It is among the leading financing institutions in the organized sector for the commercial vehicle industry for first-time users ("FTUs"), and small road transport operators ("SRTOs"). It also provides financing for passenger commercial vehicles, multi-utility vehicles, etc.
|DESCRIPTION||Mar-15||Mar-16||Mar-17||Mar-18 E||Mar-19 E|
|Profit Before Taxation & Exceptional Items||1842.39||1781.43||1923.92||2308.90||3000.74|
|Exceptional Income / Expenses||0.00||0.00||0.00||0.00||0.00|
|Profit After Tax||1237.81||1178.20||1257.34||1570.05||2040.50|
The niche business segment, favourable macros environment and falling interest rate augur well for Shriram Transport Finance Ltd. In the short run, the GST implementation and BS IV norms will drive the demand. The company is currently trading at 2.86x P/B of FY19 and 2.5x P/B of FY19E. Hence, we recommend you to buy the stock at CMP.