Shriram Transport Finance Company: In For The Long Haul

In the stock markets, consistency is a highly regarded virtue, and very few companies are able to bring this to the table. One such company is Shriram Transport Finance Company (STFC), which has managed to overcome various economic cycles in the past. Even in a difficult economic scenario where all other financing companies are witnessing pressure, STFC has managed to sustain its margins and contain its non-performing assets (NPAs) at lower levels.

Not only that, while the other companies are still struggling to get their summation right in the face of declining automobile sales, STFC has come out with new products. Though small in ticket size, the new products provide much-needed support to the company’s current portfolio of financing new as well as pre-owned commercial vehicles. 

To understand the future strategy of the company, we met with Umesh Revankar, MD & CEO, STFC. He explained how the company has managed to benefit from its strategy to serve the underserved and what kept the company ahead of its peers, and spelled out a few of the planned strategies going ahead.

Understanding The Business

STFC is one of the leading non-banking financial companies (NBFCs), and has approximately 25 per cent of market share in the pre-owned and around six per cent market share in new truck financing. The company is strategically present in high yield pre-owned commercial vehicle financing. Here lies the answer to why it has been able to sustain its growth rate despite auto companies witnessing tough times on account of slower volume growth.

In this regard, Revankar states that, “We are present in a niche segment of financing used commercial vehicles, where not many peers are present. And there are many challenges for organised players to enter this segment”. While this has definitely provided STFC with an edge over others, what has helped the company in driving growth is its ability to scale the business higher. To quantify this, its assets under management (AUM) stand at Rs 53781 crore as on September 30, 2013 from Rs 23320 crore in FY09, which makes for a four-year CAGR of around 20.81 per cent.

While the AUM has witnessed strong growth, the company has also been able to contain its NPAs. Over the past one year, where most of the delinquencies occurred for most of the NBFCs, STFC has managed to reduce its Net NPAs to just 0.70 per cent from the levels of 0.80 per cent in FY13.
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Strong Yields For Pre-Owned Vehicles Financing

In the financing business, containing the cost of funds and sustaining margins are the most important aspects. We feel that STFC has an edge on both these fronts. Regarding the cost of funds, the company has good ratings and hence has been able to raise funds at a lower cost. Recently, it tapped the bond market and elicited a good response.

STFC has managed to raise funds at a lower cost not only on the retail front, from banks and institutions as well. Currently, 18 per cent of its loan book is in retail and the remaining is banks and institutions. However, one worrying factor is that a majority of the loans (72 per cent) are on a fixed basis and the remaining 28 per cent is floating. This means that the company may not get an advantage if the interest rates start declining.

On the net interest margins front, the NIM stood at 6.87 per cent for H1FY14 as against 7.55 per cent in H1FY13. Pressure on the margins was seen on a sequential basis too. However, we feel that the worst is over for the company on this count. Even if there is no improvement, the management is confident of sustaining the margins at the current levels.

The yields are better for the com- pany in pre-owned CV financing. Lending yields are around 18-24 per cent in pre-owned vehicles (five to 12 years old) and around 15-16 per cent in vehicles between two-five years old. As for new vehicles, the yields vary between 14-16 per cent. Currently, pre-owned vehicles are mainly driving growth, and hence, the yields are likely to be sustainable.

This leads us to the next point about a possible decline in margins once the new truck sales starts picking up. But Revankar avers, “To sustain our margins, we balance our portfolio accordingly. As the new truck sales improve, we increase our loan-to-value (LTV) ratio. This automatically results in lower advances”

Asset Quality Expected To Improve After Two Quarters 

The management has stated that while the asset quality is likely to remain under pressure in the second half of FY14 start easing out in the next two quarters. However, the markets always discount the future and the stress levels seem to be priced in at the current levels. Revankar adds, “Though transportation activity has improved in the agricultural segment, the real impetus would be provided only if mining and manufacturing captures pace. We expect improvement on the stress levels to start from the first quarter of the next fiscal”.

Expected Growth Drivers 

What will interest investors more is the further growth drivers for the company. Revankar explains, “We are growing in new geographies and are also focusing on rural markets for growth. We now have 620 branch offices and an additional 515 rural centres”. STFC used to be South-centric earlier, but new branches are being opened across India now. “We are expecting major growth coming from the northern part of the country”, says Revankar. 

The Commercial Vehicles financing market is worth Rs 185000 crore. STFC targets the largest market segment of pre-owned vehicles, accounting for 42 per cent of the total market volume. The market for second-hand truck financing is under-penetrated, as 65-70 per cent of the market is with private financiers who charge high interest rates. Being an organised player and the first mover, STFC has a distinct advantage. Apart from this, we feel that its focus on the rural segment and entry into new and underserved territories would help the company in generating better volumes.

STFC has already started to focus on the new products along with established ones in CV financing. The company has introduced the top-up loan scheme to finance parts like engines, tyres and other working capital requirements. Revankar believes that though the ticket size lower in this segment, it provides access to a new growing market as well as helps service the company’s existing clientele. Though this is not a very fast growing segment, it enables establishing a strong rapport with clients and invites repeat business.

So far, the company had been financing only ‘earning’ vehicles. Going ahead, it has plans to extend loans for private cars too. However, the roadmap on this is not yet clear, and it may be premature to comment on the same.

Another potential growth driver for the Shriram Group would be allotment of banking licences, for which it is also a contender. Though the government has asked the RBI to expedite the process, the recent development of Tata Sons and a few others pulling out of the race has robbed some of the sheen. The management of this company reserves comment on the matter as it is still in gestation.

Strong Financial Performance 

The company has posted higher topline and bottomline figures for 10 years consecutively. Even during the global recession in 2008, it managed to put in a good financial performance. The only worry here is the income from securitisation. In the second quarter of the current fiscal, this has witnessed some decline as compared to that in FY13. However, the management has stated that it would keep the securitisation income at the current levels.

Outlook 

That STFC has managed to maintain its margins even after growth in advances is truly creditable. Improvement is also expected in the asset quality after two quarters. With the product portfolio also likely to provide some momentum, we expect the performance to improve going ahead. As regards the valuations, the scrip is currently trading at 3x its book value. Though this is in line with its peers, we recommend investors not to jump headlong into the counter. Start accumulating the stock on every dip as it may witness a small downside in the December 2013 quarter. Investors can accumulate the stock with a target price of Rs 720-750 over the next one year.