Shriram Transport Finance Corporation: Motilal Oswal Research Report

Motilal Oswal is bullish on Shriram Transport Finance Corporation and has recommended buy rating on the stock with a target of Rs 930 on the following investment rationale:

Shriram Transport‘s 3QFY11 PAT grew 27% YoY to Rs 3 billion, driven by 45% YoY growth in net income (including income from securitization). This was led by disbursement growth of 30% YoY and NIM improvement (on AUM) by 57bp QoQ to 8.91%. In 3QFY11 SHTF provided Rs 552.7 million to comply with recent RBI guidelines to provide 25bp on standard assets.

Shriram Transport reported 3QFY11 PAT growth of 27% YoY at Rs 3 billion (against our estimate of Rs 3.3 billion, 41% YoY). Adjusted for provision on standard assets, PAT would have been higher at Rs 3.4 billion (in line with our estimate). Shriram Transport‘s Net income (including income from securitization of Rs 4 billion) was up 45% YoY at Rs 8.5 billion. NIMs on AUM improved to 8.91% (7.37% in 3QFY10 and 8.34% in 2QFY11). The decline in cost of funds by 80bp and utilization of excess liquidity helped to improve NIM on AUM. Yield on funds declined 40b QoQ to 18.5% due to an increase in disbursements towards new vehicle loans to 29.2% from 24.1% in 2QFY11 and 18% in 3QFY10.

Shriram Transport‘s utilization of excess liquidity and resort to securitization led to lower borrowings in 3QFY11. Borrowings were down 6.3% YoY (up 3.9% QoQ) at Rs 211 billion. At the end of 3QFY11, 74-75% of the liabilities of Shriram Transport were on a fixed rate basis. Shriram Transport‘s Operating expenses grew 67% YoY and 8.1% QoQ. Cost to income ratio was sequentially stable at 25.7% (22.3% in 3QFY10). Absolute increase in operating expenses was largely due to brokerage/commission charges paid for raising retail liabilities (up 9.4% QoQ). SHTF recruited 1,011 employees during the quarter. Gross NPA declined QoQ to 2.4% from 2.54% at the end of 2QFY11. Provision coverage ratio was 80.7%. Provision towards NPAs/bad debts written off (excluding standard asset provision) as a percentage of total assets was 1.63% against 1.8% in 2QFY11 and 1.5% in 3QFY10. The stock trades at 2.5x FY12E BV. Maintain Buy with a target price of Rs 930 (2.8x FY13E BV).