Shriram Transport Finance : HOLD

Pressure on Margins Visible

Shriram Transport Finance (STFC) reported profit growth of 29% YoY to Rs 3.4 bn, marginally higher than our estimates. Net interest income increased 8% YoY which led to moderation in NIMs (down 85 bps QoQ). However, robust income growth from securitization (up 43% YoY) drove 23% YoY growth in operating profit.  AUM  rose  24%  YoY  to  Rs  360  bn  (up  7%  QoQ)  driven  by higher growth in New CV disbursements (up 111% YoY) & contributing 28% of the disbursements made in the quarter.

Key highlights

• Margins: NIM (on AUM) was at 8.06%, fell 85bps QoQ. Gross spreads at 10.7% declined by 62bps QoQ. Cost of funds rose ~100bps on securitized portfolio, post the implementation of Base rate.
• Asset Quality: STFC maintained healthy asset quality with absolute gross NPA declining to Rs 5.28 bn (down 3% QoQ). Provision coverage ratio improved by 600bps to 86% QoQ.
• New CV – the main driver: Disbursements rose 59% YoY driven mainly by the growth in new CV segment. New CV disbursements increased at a higher rate at 111% YoY & 14% QoQ. Pre-owned CV’s disbursement share declined to 72% from 79% a year ago.
• Off-book AUM is high at 45% of total AUM (38% in Q4FY10) as STFC has done securitization of Rs 60.9 bn in Q4. Deferred securitization  income  of  Rs  36  bn  will  be  recognized  over  the next few years.
• Management has guided for 15-20% growth in business with pressure on NIMs in FY12E and an AUM target of Rs 500 bn by FY13E with securitization ratio of 1/3rdin the long run.

HOLD rating with an unchanged TP of Rs 780

Changes in securitization rules proposed by RBI, if implemented, will definitely hurt STFC as incremental securitization will become challenging, putting pressure on margins. We believe concerns regarding slowing business growth & pressure on margins will remain an overhang on the stock. We maintain our TP of Rs 780 with a HOLD rating on the stock. (Target P/BV of 3x

FY12E Adj BV and 12.4x FY12E EPS).