Shriram: On a roll

Exposure to small truck operators helped boost net interest margins

The first two months of the current fiscal have seen 6 per cent y-o-y fall in sales of medium and heavy commercial vehicles though light commercial vehicles have done well.
Thus, the volume of trucks sold in the first half of the current fiscal should be weak resulting from a spurt in capacity addition last year and also the gradual return of overloading in some parts of the country.

Besides, companies appear to be using the railways more often. Also, freight rates have either fallen or remained flat and interest rates have moved up by about 400 basis points in the last 12 months, aggravating the situation for truck operators.

Manufacturers are doing their bit to push sales by offering discounts, but judging by the numbers, operators are putting off fresh purchases. Against this backdrop, Shriram Transport Finance, which posted some strong numbers for FY07 with disbursements up 62 per cent to Rs 6,600 crore, could see its business slackening in the current year.

The financier has always enjoyed high net interest margins because it has successfully catered for small truck operators, a segment which banks and other lenders have found to be risky.

However, in Q4 FY07, disbursement of old trucks, which is the company's core segment fell 4 per cent compared with a rise of 43 per cent for the full year. The stock has had a dream run outperforming the market in the past year.

At the current price of Rs 158, the stock trades at about two times FY08 adjusted book value and appears to be expensive given the impending slowdown in the sector.

BoI: On the slow track

Bank of India's net interest income in the last quarter of FY07 grew slowest at 15.5 per cent to Rs 968 crore compared with the previous three quarters of the year.

Interest expenses rose much faster at 41.5 per cent compared with 30.6 per cent in interest income thanks to lower income on investments and other interest.

As a result, BoI's Q4 FY07 domestic net interest margin declined by 17 basis points y-o-y at 3.96 per cent and global net interest margin fell by 20 basis points to 3.34 per cent. This was because its cost of funds rose faster than its overall yield.

But if BoIs core banking operations were not up to the mark, the bank has compensated by improving its non-interest income, which grew 78 per cent y-o-y at Rs 577 crore.

This helped it maintain operating profit growth at over 40 per cent. Net profit also got a boost with 76 per cent growth despite a doubling of provision for taxes. The bank managed to halve its net NPAs in Q4 FY07 compared with a y-o-y basis.

Analysts say the fourth quarter results have been in line with expectations, and remain enthused by the bank's growth prospects. For FY07, its net advances improved by 31 per cent, and deposits went up 28 per cent.

Its low-cost deposits remained stable at 40 per cent of total deposits. With the rally in banking stocks, BoI too has rallied 18 per cent in the past four sessions. It trades at 1.4 times its estimated FY08 book value, and may have some steam left.

With contributions from Shobhana Subramanian and Priya Kansara