Shriram Transport Finance – IndiaInfoline Research Report

IndiaInfoline have suggested a BUY on Shriram Transport Finance with the following investment rationale:

Shriram Transport Finance’s new initiatives—facilitating CV purchases and refurbishing vehicles (available in the open market) to sell for a profit—have progressed well. This demonstrates the economic benefits of its strong franchise in its chosen segment of borrowers and the niche asset class. With fee income expected to double in FY11, a buoyant loan growth scenario, 40% of AUM securitised at attractive spreads, and abundant liquidity aiding the liability side of the balance-sheet, Shriram Transport Finance’s business appears robust.

Valuation multiples of Shriram Transport Finance reflect the strong momentum and high RoE, but valuations are still significantly below historical highs. We retain BUY.

Auto-mall subsidiary launches touch-screen kiosks: Shriram Transport Finance has extended its concept of “Truck Bazaars”. Potential buyers and sellers of commercial vehicles (CV) will now have access to computerised touch-screen kiosks that provide updated information on all CVs to be sold. The kiosks, branded Shriram One Touch, are to be rolled out across all of its 486 branches.

CV auction business to be launched in October 2010: As part of this initiative, Shriram Transport Finance will refurbish vehicles that it has repossessed itself. In addition, vehicles going cheap in the open market would also be refurbished and sold for a profit, under the brand name Shriram New Look. The first large-scale auction is slated for October 2010.

Rising rates are not a risk: Margin defence and maintenance of growth momentum is much easier for price-setters such as Shriram Transport Finance, despite rising borrowing costs. Shriram Transport Finance can price new loans appropriately without loan demand being adversely affected. In spite of an asset-liability mismatch (all assets at fixed rate), even a 100bps swing from rising borrowing costs does not look significant in relation to an existing NIM of 800bps.

Fee income initiatives fructifying

Shriram Transport Finance plans to set up 50-60 branded outlets for selling repossessed used CVs, at a total set-up cost of Rs700m-800m. Shriram Transport Finance’s Chennai auto mall is already complete and the one in Baroda will be completed next month.

With total vehicles against loans at about 800,000, Shriram Transport Finance repossesses about 1%, or 8,000 vehicles annually. These can now be sold through these auto malls. Shriram Transport Finance has also spoken to its competitors (including financiers of new vehicles), who are also willing to sell their inventory of repossessed vehicles through Shriram Transport Finance. Shriram Transport Finance also estimates that out of the 5 million trucks on the road in India, about 1.5m-2m get traded every year.

Shriram Transport Finance also plans to buy some vehicles from other financiers and yard sales, and re-brand them as Shriram New Look, after retrofitting them. The labour used for such purpose will be job contracted locally; Shriram Transport Finance does not need to add much operating capacity for this.