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We all know how much under-served rural India is when it comes to banking and allied services. While filling such a gap targeting those with no credit history is indeed courageous, the returns too are in the line of risks undertaken. Ask Shriram Transport Finance Company (STFC), which, with its humble inception in 1979, is today the largest asset financing NBFC with Assets Under Management (AUM) of Rs 39,260 crore as on December 31, 2011. The company enjoys a leadership position in organized financing of pre-owned trucks with strategic presence in 5- to 12-year-old trucks and a market share of around 20-25 per cent. It has a 7-8 per cent market share in the new Commercial Vehicle (CV) financing space too where it capitalizes on its existing customer base upgrading to new trucks.
It also helps to be a part of the parent Shriram Group which has presence in sectors as varied as engineering, IT, automobile, pharma and realty, among others.
Strengths
The unique and well-executed relationship based business model has attracted several investors-both strategic and portfolio.Shriram Group has always been on Private equity’s (PE) radar and hence their undisputed destination of choice in India. This is reflected in the fact that 23 PE investors have invested over USD 750m in the group since 2005. Four of those investments were in STFC totaling USD 115 million and included PEs like ChrysCapital and TPG. Currently, FIIs hold around 41 per cent stake in the company.
The company employs a strategic mix of both retail deposits as well as institutional funding. Currently, retail deposits make up 22 per cent of the borrowings which the company targets to increase going forward. It currently has access to low cost funds at 10.5 per cent which translates into a healthy net interest margin (NIM) of 7.39 per cent compared to 5.1 per cent of peer Mahindra Finance.
* In Q3FY12, the company reported gross non-performing assets (GNPAs) of 2.8 per cent whereas net NPAs stood at 0.40 per cent. The coverage ratio is maintained at a healthy 86 per cent. Comforting further is the capital adequacy ratio of 24.91 per cent as against 12 per cent mandated by RBI. This is one of the best among the peers.
* Closely tied up with the fate of India’s consumption story, STFC is empowering rural India with earning power. It finances the sale of a pre-owned truck to a driver who then becomes the owner and has a loyal customer base of over 8 lakh.
* The company has a pan-India presence through a network of 69 Strategic Business Units (SBUs), 498 branch offices and partnership with over 500 private financiers. The latter allows to enjoy increased market share without having invested in the infrastructure for opening new branches.
* The company has diversified itself into a lot of related offerings. For instance, it has on offer tyre loans, working capital loans, equipment finance loans and accidental repair loans. Further, the company is strengthening its business model by investing in innovative platforms like ‘Automalls’, ‘New Look’ and ‘One stop’.
Concerns
We are amidst a global economic slowdown which has had its effects seen on emerging markets as well. We clocked a mere 6.1 per cent GDP growth in Q3FY12 and cannot say with surety whether the worst is behind us. A slowing GDP growth has a direct impact on the sale of CVs which could lead to falling disbursals as witnessed in the previous quarter. This could also lead to a rise in the levels of NPAs.
* As and when the RBI accepts the Usha Thorat committee recommendation of recognizing gross NPA post 90-day overdue instead of the current 180-day norm, it could have a one time bearing on the GNPA numbers.
* Around 23 per cent of the AUM is against financing of new CVs. The competition in this segment is getting intensified with a lot of banks and captive NBFCs of auto companies targeting this market.
Financials
When we look at STFC’s financial statements, we see a rapidly growing P&L account coupled with a healthy balance sheet. The AUM has more than trebled to Rs 39,260 crore in Q3FY12 (TTM) compared to Rs 12,000 crore in FY07. During the same period operating income grew at a compounded rate of 42 per cent and earnings per share grew at 43 per cent. This resulted in shareholders fund increasing from Rs 1,086 crore in FY07 to Rs 5,552 crore as on September 2011.
Owing to its strong internal accruals and healthy net interest margin, the overall gearing stands at 3.92, providing enough elbow room to raise further debt. Q3FY12, on the other hand, disappointed by reporting a slower growth in AUMs, rising cost of funds and a contraction in NIMs. A slower or muted growth in next couple of quarters could be possible until macro headwinds play out.
Valuation
At the current price of Rs 581, it is ruling at a price-earning multiple of 10.2, a discount of 25 per cent to its median PE of 13.6. The five-year EPS growth of 43 per cent translates into an attractive peg of 0.23 with dividend yield of 1.12 per cent. Price to book value currently stands at 2.2 which is cheap compared to peers like Mahindra Finance trading at a P/BV of 2.4. Though, a volatile macro economic environment is likely to act as a headwind in the near term, the long term story is intact. BUY.
This article was originally published on April 27, 2012.
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