Shriram Transport Finance Ltd. : Patience will pay! - BUY - IIFL

CMP Rs927, Target Rs1,180, Upside 27.3%

AUM growth recovery to start from FY17

Our meeting with STFC revealed that AUM growth is unlikely to accelerate significantly in near term as rural and urban consumption still remain weak. Company's core customers (owner-drivers and SRTOs) have not witnessed any revival in vehicle utilization so far. However, the sharp decline in fuel prices has improved margins of truckers and prices of older used CVs which is a business positive. In longer run, we expect demand for older used vehicles to recover cyclically thus driving an AUM CAGR of 18-20% over FY16-18.

NIMs and credit cost to be drivers of profitability improvement

Outlook for STFC's NIM is quite encouraging underpinned by various factors a) securitized portfolio yield should move north as collection efficiency improves b) yield on on-book portfolio will be resilient due to sustained AUM shift towards older used CVs c) cost of bank borrowings would decline in-line with Base Rate d) benefits from lower Bonds/CP rates will continue bolstered by recent upgrade in credit rating to AAA. As per management, transition to 90dpd NPL recognition would not impact credit cost as the buffer of a high PCR would be utilized. On contrary, any cyclical easing in stress could drive some moderation. We estimate STFC to revert to 3%+ RoA and 18%+ RoE by FY18.

Worst likely over in equipment finance business

STFC has decided to merge the equipment financing subsidiary with itself. Presently, the sole focus is on working out recoveries from the defaulted customers and the efforts are translating into encouraging collections. Management intends to resume AUM growth from end 2015 but with a revamped strategy. The CE industry has started to show positive signs as the prices of used equipments have improved. A pick-up in infra/industrial construction activity will aid growth and NPL recovery.

Valuation at mid-cycle level - an opportunity to play the up-cycle!

STFC is currently trading at historical mean valuation of 2.2x 1-year rolling fwd P/ABV. On FY18 ABV, the stock valuation is at undemanding 1.8x considering the anticipated strong recovery in growth and profitability. At the start of an upcycle, if an inherently robust and profitable franchise is available at mid-cycle valuation then it's a sound case to own it.

Shares of SHRIRAM TRANSPORT FINANCE CO.LTD. was last trading in BSE at Rs.932 as compared to the previous close of Rs. 973.7. The total number of shares traded during the day was 81903 in over 4897 trades.

The stock hit an intraday high of Rs. 963.2 and intraday low of 907.2. The net turnover during the day was Rs. 76103352.

Source : Equity Bulls

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