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Wednesday, June 3, 2009

Mid Cap Growth Stock - SHRIRAM Transport Finance

SHRIRAM Transport Finance (STF) is the only player in the organised sector, which caters to finance-related requirements of small truck operators (less than two to three trucks). It is among the largest non-banking finance companies (NBFCs) in the country, and has overtaken its peers during the current slowdown.

ABOUT COMPANY
Shriram Transport Finance Company Limited (STFC), India's largest player in commercial vehicle finance, was established in the year 1979. The company has a network of 470 branches and service centres.

STFC is the flagship company of the Shriram Group which has significant presence in Chit Funds, Consumer Durable Finance, Life Insurance, General Insurance , Stock Broking, Property Development, Project Engineering, Wind Energy among others.

BUSINESS
The company has carved a niche for itself by financing second-hand commercial vehicles (CV) over the past three decades. Often, this market is considered risky by banks because borrowers, who are predominantly from the lower socio-economic group, cannot provide documentary evidence. STF has built relationships with small truck operators over relatively long time periods and this helps it get a better understanding of its borrowers.

The company’s experience in its target market acts as an entry barrier to any new player, be it a bank or an NBFC. Moreover, its business is relatively insulated from the ups and downs of the commercial vehicle industry, because the sales of trucks and other CVs speed up in the first phase of an economic boom.

However, its sales are the first to fall when the slowdown sets in, making the CV industry and its financiers victims of the vagaries of the economy. STF’s exposure to the risk arising out of a slowdown in demand for new CVs is very limited. This is because old vehicle financing accounts for three-fourths of its’s assets under management. Moreover, its business does not depend upon the capacity addition in the industry in the form of more trucks. Its business depends mainly upon exchange of old trucks.


The company has 20-25% market share in second hand truck financing. Private individuals finance the remaining 75-80%. Such players operate with their own finances, which limits their leveraging capacity. On the other hand, loans given by banks to an NBFC operating in second-hand truck financing falls under priority sector lending. Therefore, there is never a dearth of funds for STF. With greater access to funds, the company is partnering with private individuals to increase its market share. The company’s sustained growth record has attracted many private equity and institutional investors. Financial institutions like Axis Bank, ChrysCapital and TPG Newsbridge hold stakes in the company.

FINANCIALS
The growth in net profit fell from 79% in the September 2008 quarter to 38% in the fourth quarter of FY09. This was primarily due to the slowdown in the new CV market. Earlier, old vehicle financing contributed 70% to total disbursements, and new vehicle financing formed the remaining 30%. However, disbursements for new vehicles came down to almost nil in the March 2009 quarter. The management also indicated that it deliberately wants to go slow for another six months in order to take stock of the situation.

Gross non-performing assets formed 2.1% of advances as at March 2009-end compared to 1.6% a year ago. Earlier, the company used to repossess the vehicle if the repayment was delayed beyond six months. The vehicle thus repossessed used to be sold in the market. However, selling the vehicle is becoming difficult in the current environment. Therefore, the company thinks it is prudent to let the borrower retain possession for more than six months without payment by recording nonperforming loans in its own books.

Still, the growth story continues for the company because 38% growth in net profit in the March 2009 quarter comes at a time when financers of new vehicle are seeing massive falls in their bottom lines. The company plans to reach an asset under management of Rs 30,000 crore by the end of current fiscal, translating it into a growth of 29% over the previous year. India’s economy is expected to grow by 5-5.5% at an average annual rate in the next decade. This requires huge capacity additions in all kinds of infrastructure including CVs. At the same time, there are legislative pressures on banning trucks beyond 15 years. This will lead to a replacement boom, helping the company grow its loan book for both new and old CVs. It appears that STF is a long term growth story.

Market Cap 6,064.65
EPS (TTM) 30.09
P/E 9.90
P/C 9.29
Book Value 117.27
Price/Book 2.54
Div(%) 50.00
Div Yield(%) 1.68
Market Lot 1.00
Face Value 10.00
Industry P/E 9.05

VALUATIONS
The stock trades at a price to earning (P/E) multiple of 9.6 times of its trailing 12-month earnings. The company has a consistent record as its net profit has grown at a compounded annual growth rate of 63% in the past three financial years. Given its strong footing in the second hand CV space and cheaper valuations, investors can include the stock in their portfolio with a horizon of two years.
Source: EconomicTimes / MoneyControl / Shriram Transport Finance Website

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