Shriram Transport Finance Company focuses on rural markets to drive growth

Overall margins to improve, given 20% growth from rural segment

Shriram Transport Finance Company (STFC), which has outperformed the benchmark BSE Sensex in the past year (35.8 per cent versus 11.64 per cent), is increasing its focus on rural areas.
 
Revival in the rural economy due to increased income on the back of a good monsoon and improvement in infrastructure activities, especially road construction, seems to be encouraging the largest used-commercial vehicle financier in India to scale up its rural business.
 
A look at its December 2017 quarter (Q3) numbers indicates the extent of efforts in the rural segment. It not only expanded the rural branch network aggressively (by adding 164 branches) but also the share of this segment in the total assets under management; increased five per cent over the past year to 30 per cent.
 
It doesn’t end there. STFC plans to open 500 new branches in the rural areas over the next three years, which the management believes will propel rural credit growth. “With the opening of new branches, the company can easily reach the untapped rural market, where demand is accelerating,” says Umesh Revankar, managing director and chief executive of STFC.
 
In fact, the management is optimistic about clocking over 20 per cent growth in AUM from the rural segment by 2021 and expects to improve the segment's share in total AUM to 35 per cent in the next one year.
 
Though the ticket sizes of rural advances are smaller, it can improve margins for the company. “Yields are better in rural AUM (as compared to urban), which will improve the overall profitability of the company,” Revankar said.
 
On non-rural AUM, which drives the overall AUM growth of the company, the management believes it too is rising on the back of an uptick in vehicle replacement activities, rise in demand for new vehicles due to change in technology (migration to BS-VI norms by April 2020), and increase in the cost of vehicles, among others. While the MD expects the overall AUM for FY18 to grow at 15 per cent, he believes this will grow at 18-20 per cent by 2021.

Moreover, the company has indicated it will continue to achieve double-digit growth (analysts’ estimates at 17 per cent) in net interest income (interest earned minus interest expended) in FY18, which will rise to above 20 per cent in FY19. In terms of asset quality, gross non-performing asset (NPA) ratio would be a bit higher at around nine per cent for FY18 (it was about eight per cent in Q3) owing to a change in NPA recognition norms (from 120 days to 90 days). This would come down in FY19.
 
Given the positive outlook for the company, analysts see more than 20 per cent upside potential in STFC’s share price.