STFC: ON THE ROAD TO DESTINATION GROWTH

Shriram Transport Finance Company 

STFC: ON THE ROAD TO DESTINATION GROWTH 

Shriram Transport Finance Company (STFC) is among the largest players in the used CV financing segment. The nonbanking finance company is a part of the ‘Shriram’ conglomerate which has a significant presence in varied financial services such as consumer finance, broking, life and general insurance, etc. STFC, incorporated in late 1970s, started financing the neglected small truck owners. By the end of FY18, it had assets under management (AUMs) of Rs 95,306 crore, witnessing a growth of 21 per cent YoY on the back of significant surge in rural growth. The company has a pan-India network of 1,213 branches catering to about 1.86 million customers. 

Earlier this month, the stock of STFC fell nearly 18 per cent in intra-day trade after its annual report mentioned a Rs 870-crore corporate guarantee, which the firm had provided to its unlisted entity SVL Ltd. The guarantee was with respect to non-convertible debentures issued by SVL Ltd. SVL had issued zero coupon NCDs of Rs 650 crore in June 2015 (11.25 per cent IRR), maturing in June 2019. However, Umesh Revankar, MD and CEO of STFC, stated that he was quite sure that the loan commitments made by group companies will be serviced and the firm does not have exposure to any other group companies apart from SVL. He further said that the NCDs will mature in June 2019, which is still one year away and there was no need for any provisioning as he expects the loan to be serviced by SVL itself. Still, if SVL defaults on the NCDs and the guarantee is invoked, the potential hit to STFC’s BV could be around 4 per cent post tax.

 

Commercial & Passenger Vehicle Industry Overview 

The domestic commercial vehicle (CV) industry, led by truck segment, has been on a recovery phase since Q2FY18. According to the Society of Indian Automobile Manufacturers, the overall CV segment sales registered a growth of 19.94 per cent between April 2017 and March 2018 as compared to the same period last year. The M&H CVs grew by 12.48 per cent and the light commercial vehicles (LCVs) grew by 25.42 per cent during April 2017-March 2018 over the same period last year. 

The sales of passenger vehicles (PVs) grew by 7.89 per cent in April 2017-March 2018 over the same period last year. Within the PV segment, passenger cars, utility vehicles and vans grew by 3.33 per cent, 20.97 per cent and 5.78 per cent, respectively, during April 2017-March 2018 over the same period last year. 

Robust growth in AUMs 

STFC reported 49 per cent YoY growth in rural AUMs to Rs 310 billion. The company opened about 217 branches in rural areas in FY18. New CVs loan book jumped 37 per cent YoY, while used CVs reported marginally lower growth. The demand for new CVs in higher tonnage segment is increasing at a good pace, therefore, the growth opportunity in new CV financing is higher. However, company's management guided not to grow much in this segment due to lower profitability and will continue to maintain old CVs proportion over 84 per cent of AUMs. Other loans, which primarily comprise of business loans to existing customers and contribute about 5 per cent to AUMs, also grew at a robust pace. The company’s business loans are gaining traction. It started with business loans from Tamil Nadu, but it is now expanding and extending these loans in Karnataka and Andhra Pradesh.

Going forward, the company’s focus would continue to be on used trucks that are 5 years to 10 years old. The management has guided at reaching an AUM of about Rs 1,10,000 crore by March 2019 from Rs 95,000 crore now, with an expected growth of 16 per cent YoY in AUMs. We expect AUM growth momentum to continue due to macroeconomic revival.

Stabilizing asset quality 

STFC recognised NPAs on 180 DPD basis till Q3 FY16, but it has gradually moved to 90 DPD in Q4 FY18. This has led to increase in GNPAs, which increased from 3.8 per cent in FY15 to 9.15 per cent in FY18. The credit cost also increased from 2.4 per cent in FY15 to 3.8 per cent in FY18. Over FY09 to FY15, the credit cost has been in the range of 1.4 to 2.4 per cent. Due to regulatory requirement, it reached 3.8 per cent in Q4 FY18. We expect credit cost to fall over the next two years, which would drive RoA expansion.

Financials 

On the financial front, STFC reported a healthy growth in revenue and AUMs, while its net profit de-grew marginally due to higher provisions in its Q4FY18 financial results. The company posted a 19.79 per cent hike in its net sales to Rs 3,248.70 crore in the fourth quarter of FY18 as compared to Rs 2711.92 crore in the same quarter of the previous year. The company’s PBDT decreased by 14.86 per cent to Rs 203.45 crore in the fourth quarter of FY18 on a year-on-year basis. The net profit of the company declined by 3.36 per cent to Rs 144.6 crore in the fourth quarter of FY18 as compared to Rs 149.63 crore in the same quarter of the previous fiscal. However, the net interest income during the quarter rose by 30 per cent to Rs 1,486.92 crore, as against Rs 1,143.97 crore during the same period previous year. 

On the annual front, the company posted a 12.68 per cent increase in its net sales to Rs 12,201.66 crore in FY18 as compared to Rs 10,828.75 crore in FY17. The PBDT of the company also increased by about 23 per cent to Rs 2407.96 crore in FY18 as against Rs 1957.83 crore in the previous fiscal. The company posted an increase of 24.71 per cent in its net profit to Rs 1568.02 crore in FY18 on a year-onyear basis. 

STFC sold its controlling stake in the wholly-owned subsidiary Shriram Automall India Ltd (SAMIL) during 2017-18 for Rs 156.38 crore to MXC Solutions India Pvt Ltd. The profit on the sale of SAMIL shares was Rs 139.75 crore. On the valuation front, the company has a return on equity (ROE) of 12.38 per cent and return of capital employed (ROCE) of 34.11 per cent. Further, the stock is trading at a PE of 19.22x as against its peers M&M Finance (28.48x) and Cholamandalam Investment & Finance (27.77x). 

Conclusion 

We believe that the event with respect to SVL could be a one-off event and one should not be too worried about credit issues with names such as STFC. Post the recent correction (about 22 per cent in three months) and even factoring the potential adverse impact of STFC honouring the NCD payments of SVL Ltd, we see the company attractively priced. Also, considering the stronger CVs volume, macroeconomic recovery, improving rural market and lower credit cost, we recommend our readerinvestors to BUY the stock.