>Shriram Transport Finance Company Ltd. (SKP Securities)

Company Profile

Shriram Transport Finance Company Ltd. (STFC), a flagship company of the Shriram group is India’s largest asset financing institution with a pan-India presence. It provides finance to almost 600000 customers and enjoys a track record of almost three decades (since 1979) in this business. STFC is mainly engaged in financing commercial trucks between 5-12 years. It’s consumer base consist of Small Truck Owners (STOs) and First Time Users (FTUs) with market share of 20-25% in preowned CV financing and 7-8% in new CV financing segment.

Investment Rationale

· Unique Business Model – A steering towards growth

STFC has created niche in financing the small fleet operators. It follows a relation based business model thereby substituting formal credit evaluation tools. The relationship based management helps the company to keep a close check on their credit profile, ensure ready business thus maintaining peer pressure thereby restricting defaults. Accordingly the company’s NPAs are restricted below 2%.

· Robust growth in loan book

STFC is aggressive in lending the small ticket size segment through referrals. Simultaneously it maintains client and truck wise exposure with the LTV restricted to 65%. The company has also introduced a wide range of products to the segment and arranged various road shows and truck utsavs. This has helped STFC to widen its reach and increase its disbursements to Rs. 11590 crore. Going forward, we expect disbursements to grow at 35% CAGR (FY08-FY11) and reach to Rs. 28215 crs.

· Margins to remain intact

STFC being the NBFC, it doesn’t have access to low cost funds like banks. Therefore over the years it has reduced borrowing from retails, which lowered its cost of funds. Since the company mainly finances the small operators, the yield earned on assets is quite high. This helps to keep the NIMs intact at approx 7%. The lower branch and employee cost helps to maintain lower operating cost, thereby keeping the PAT margins at 16%. We expect NIMs and PAT margins to be in the range of 7-8% and 13- 15% respectively.

· Efficient collection system to restrict credit losses below 2%

STFC mainly finances STOs & FTUs who has underdeveloped or no banking habits. Collection is always a challenge as these people are scattered in remote areas. To overcome this issue, STFC made its employees responsible for recovery in cash on every installment due date. This helps to keep an eye on the financial position of the customer and take adequate steps to reduce the credit losses below 2%. We expect STFC to maintain same level of credit losses inspite of prevailing challenging scenario.

· AUM to grow at 25% CAGR over FY08-FY11

STFC registered more than 60% growth in AUM from Rs. 12038 cr in FY07 to Rs. 19520 cr in FY08. The growth was mainly achieved due to availability of ready funds to the company. The inflow of funds leveraged company’s brand, customer base, wide reach and strong business model. Going ahead we expect the same factors to drive the growth of AUM to Rs. 37619 cr. by FY11.

Outlook & Recommendation

STFC being a leader in the financing of the STOs and FTUs, the unique business model will act as a support to survive in the prevailing slowdown and restrict its losses below 2%. We value the stock at 1.50x FY 11E book value implying a price target of 247 (33% upside) in 12 months and recommend accumulate rating on the stock.

To see full report: STPC