Recovery key for Shriram Transport's valuations

The stock has witnessed a hope rally and largely factored in near-term positives

Shriram Transport Finance Corporation (STFC), India’s largest commercial vehicle (CV) financier, stands to benefit significantly from a likely pick-up in economic activity, a fact well reflected in its current valuations. The rise in the stock, which hit a 52-week high of Rs 1,021.3 on Tuesday, was in sync with the sentiment-driven rally in most domestic cyclicals. A revival in the economy will boost STFC’s asset growth and rub off favourably on its margins and return ratios.

However, on-ground indicators remain bearish (resale value of CVs under pressure; lag in passing higher diesel costs by truck owners through higher freight rates; and moderation in used and new CV disbursements). While analysts remain positive on the company from a long-term perspective, most believe a large part of the good news has already been priced in.

“Our sensitivity analysis reveals if AUM (assets under management) growth rises to 30 per cent in the recovery year, combined with leaner balance sheet management, RoE (return on equity) could improve 400-500 basis points to 24 per cent. The stock is already being traded at 2.5 times the FY15 estimated book value, capturing the better part of our bull-case RoE expansion,” Santanu Chakrabarti, analyst at ICICI Securities. Of the 22 analysts polled by Bloomberg since May 2014, 10 have a ‘buy’ rating on the stock, seven ‘hold’ and five ‘sell’. Their average target price of Rs 890 indicates a correction of 11 per cent from current levels.

Performance has been hit by weakening economic growth and a fall in demand for CVs through the past few quarters. STFC’s AUM growth has fallen sharply — from 23.5 per cent year-on-year in the March 2013 quarter to 6.9 per cent in the March 2014 quarter. At 10 per cent year-on-year, the quarter ended March this year also witnessed a consecutive quarterly fall in disbursements, against 7.7 per cent in the December 2013 quarter. This, along with falling securitisation income, has hit the company’s net interest margins. Consequently, its return on assets ratio fell from 3.5 per cent in FY11 to 2.2 per cent in FY14. Also, stress is increasing on the company’s asset quality, with gross non-performing assets rising from 2.9 per cent in the December 2012 quarter to 3.7 per cent in the quarter ended March this year.

The company’s management remains cautious and expects AUM to grow 10-12 per cent this financial year, subject to a back-ended economic recovery and a strong monsoon. The management has also stepped up focus on recoveries and expects the asset quality to stabilise.

Amid this environment, if things don’t improve at the ground level, the stock is likely to languish at current levels.