Stock Pick From Finance (including NBFCs) Industry

Here Is Why:

• CRISIL upgrade to lower its borrowing cost.
• Adequate provisioning to lower its net NPAs in the future.
• Wide rural network to benefit from revival of pre-owned commercial vehicles.

Over the last couple of quarters, financial stocks have been struggling to show traction in the market due to low credit growth and bad asset quality. However, with the government starting public sector spending to boost the economy, we are of the opinion that the financial sector is poised for revival and will show good credit growth. Hence we are recommending a non-banking finance company with strong presence in commercial vehicle financing. Shriram Transport Financing Company (STFC), the flagship company of Shriram Group, is an asset financing and non-banking financial company which provides commercial vehicle finance to its customers.

Recently, rating agency CRISIL upgraded STFC’s rating on long-term debt instruments, bank facilities and fixed deposits from CRISIL AA/FAA+/Positive to CRISIL AA+/FAAA/Stable. The rating agency mentioned in its report that the improving outlook for the commercial vehicle (CV) industry will support sustained improvement in the company’s asset quality and profitability over the medium term. An upgrade from CRISIL will work as a huge benefit to the company, especially at this juncture when the economy is reviving. Moreover, STFC will be better placed to raise funds at lower cost both from the bond market and also from banks.

Recently investors were worried about the merger of Shriram Equipment Finance Company (SEFC) with STFC and harboured concerns over the impact of bad asset quality of SEFC on STFC’s asset quality and profitability in the future. However, construction equipment business contributed only 4.6 per cent of the consolidated asset under management (AUM) of STFC at the end of Q1 FY16. Hence we believe that the impact of the merger will be marginal in view of the small scale of operations.

STFCL’s gross non-performing assets (NPAs) stood at 3.74 per cent as on June 30, 2015 against 3.80 per cent as on March 31, 2015. Furthermore, STFC has made adequate provisions for NPAs, which remained low at 0.78 per cent as on June 30, 2015 with a contraction of 1 basis point on a sequential basis.

The company continues to focus on rural branches in FY15 and penetrated deeper into rural areas by opening 147 new centres, taking its total of such centres to 776. In the last three years it has added more than 1,000 branches. STFC has pioneered the organised pre-owned CV financing market in India and held around 90 per cent share in this market as on March 31, 2015. Pre-owned CV financing constituted about 91 per cent of the company’s assets under management (AUM) as on March 31, 2015.

With its wide presence in rural India, STFC is expected to face limited competition from other organised financiers. Also, the expected revival in the commercial vehicle segment will put STFC in a better position in the market. Hence we recommend buying this stock.