An under-penetrated market, better margins and improving external factors are positive for Shriram Transport Finance
The Rs 500 crore non-convertible debentures (NCD) issue of Shriram Transport Finance Company (STFC) closed on August 14; an option to retain a further Rs 500 crore in the event of over-subscription is also being exercised. As it turned out, the company received subscription worth Rs 5,000 crore on the very first day of opening. The overwhelming response to the NCD issue not only suggests a growing investor appetite for corporate debt paper, but also a probable reaffirmation of the company’s business model of financing pre-owned commercial vehicles (CV).
The CV finance major’s brand might have been in existence for the last thirty years; it was not until the last five years that it started gaining wider acceptance which is visible in the near ten-fold increase in assets under management. An increased acceptance of institutional community to fund its growth is the reason for higher lending.
Even during the recent downturn, the company’s business was not significantly impacted with stable margins in core operatons and bad loans under control, thanks to its adherence to risk management practices. With the economy showing signs of recovery, liquidity improving and costs coming down, STFC should do well.
Breaking the shackles
STFC is mainly engaged in financing of pre-owned CVs in the age profile of 5-12 years, while some revenues accrue from financing of new CVs. This focus helped to grow at a robust 50 per cent on an average in the last five years. However, the unprecedented economic slowdown in the second half of 2008-09 had put a brake in disbursements, which was flat year-on-year.
The impact on the economic activity was visible on a slowdown in the new vehicle sales in the country. The decline in freight rates and volumes, and lower operating margins were behind the slowdown of new truck sales. New CV segment makes up for 30 per cent of its total CV loans; the latter accounts for about 85 per cent of total loans.
Comparatively, the used segment held up and displayed steady demand, primarily on account of low-ticket size loans. With the economic activity picking up, the winds of change have started blowing; disbursements in the first quarter 2009-10 rose at 15 per cent, compared to the negative growth witnessed in March 2009 and December 2008. The company that was cautious in the last two quarters of 2008-09, has started to lend more.
Besides that, company’s focus to forge alliances with small private financiers would be helping it in the future. As part of the arrangement, the smaller financiers contribute partly to the pre-owned CV loans allowing STFC to expand its market share. Almost 10 per cent of STFC’s loans are flowing through this channel and the firm hopes to grow this network further. However, slippage in monsoons would affect its loans to vehicles related to the agricultural segment. On the whole, the management indicates that disbursements could grow at 20-25 per cent for 2009-10.
Sound financials
STFC lends to small truck owners and lending to pre-owned CVs is perceived to be risky due to the tedious collection mechanism and customers lacking banking habits. This is relevant in a difficult environment. Yet, the company has turned this model viable with manageable deterioration in asset quality (gross NPA rose from 1.7 per cent to 2.1 per cent in first quarter 2009-10) and higher than industry yields.
The relationship model on which it operates, non-acceptance of post-dated cheques does enable personal and regular contacts for timely recoveries. The company’s focus on keeping the loan to value at 65 per cent has also helped maintain healthy asset quality. In line with macro headwinds, even though asset quality is stable, better provisioning has helped net NPA reduce to 0.8 per cent now from 0.9 per cent, in June 2008 quarter.
In terms of funding mix, STFC’s historical dependence on retail deposits has given way to higher institutional borrowing. The share of retail deposits was around 75 per cent in 2004-2005 and this subsequently reduced to around 15 per cent, lowering its overall cost of funds in the last five years.
The Rs 1,000 crore retail money raised recently with tenure of 3 to 5 years at 10.75-11.25 per cent coupon rate is higher compared to its cost of funds of 10.5 per cent. However, together with existing retail liabilities, it would still make up about 20 per cent of total liabilities. Nevertheless, these proceeds could turn out to be long-term positive as it provides cushion on the asset liability position, besides diversifying the liability profile.
Overall, while reported NIMs have trended lower, it is also due to the increasing cash balances with STFC, which yield lower returns. These have hovered around 6-7 per cent in the core business in the last one year. Going ahead, with funding costs easing, expect the NIMs to be around 7 per cent in 2009-10.
Conclusion
The stimulus packages and lower excise duties are positives. Although HCV sales are yet to fully recover, an improvement in demand for light and medium CVs segment is positive as STFC mostly caters to this segment. With 70-75 per cent of the pre-owned segment still in the hands of the private financiers, there are opportunities for greater lending in the long-term.
STFC is also leveraging on its experience in vehicle financing business and is diversifying into financing of three-wheelers, passenger CVs and pre-owned tractors. This currently accounts for 15-20 per cent and the management intends to grow this segment in the future as well. Great pedigree in the business, stable asset position and best in the industry margins amongst the organised players provides comfort.
At Rs 346, the stock is up 14 per cent in the last few days and is trading at 2.15 times its estimated 2010-11 adjusted book-value. While valuations are a tad steep, the stock could be considered on dips.
