Shriram Transport Finance-Q4 FY17 and 12mnth FY17 Results Update

India focused Portfolio Advisory - Exp of 40+years, Das Capital Management and Advisors

Arun Thirumalai

India focused Portfolio Advisory - Exp of 40+years

Das Capital Management and Advisors

Das Capital is a research boutique with an aim to continuously map and plan the investment needs of investors focused on India. We have a six member research team with a combined experience of over 40 years as a part of our investment wing. Our team assisted in the setup of Premji Investments, which was one of India’s first family offices focused to managing Mr.Azim Premji personal wealth. We also serve as a research team to two Indian private equity energy funds “Small is Beautiful” and “KSK Emerging India Energy Fund”.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/253" target="_blank" data-smartkarma-citation="entities:253:1">Shriram Transport Finance (SHTF IN)</a> is one of the leading NBFCs in India with a focus on financing used commercial vehicles. The company is a market leader with near 25% market share in financing the used vehicle segment with the rest fragmented among banks, NBFCs and small unorganised players. The company with a track record of 30 plus years in this segment has created a niche positioning which is hard to replicate, by  establishing significant entry barriers. Strong management associated with it since inception and backing of deep pocket investors like Mr. Ajay Piramal of Piramal enterprise is an added advantage. Rrecent regulatory changes have affected performance adversly.We beleive these changes are transient,  and the resultant impact on account of these, will provide an opportunity for long term investors. Dominant Market Positioning <ul class="ember-tether-target ember-tether-enabled ember-tether-element-attached-top ember-tether-element-attached-left ember-tether-target-attached-top ember-tether-target-attached-right"><li>Strong Customer Base: The company enjoys a strong customer relationship evident from the fact that nearly all the loan disbursals are to the existing customers having a long-term association with the company. Disbursal for new vehicles is also done to the existing customer base only.</li><li>Deep credit history-significant entry barrier: The company has nearly 30 years of credit history of its customers who are mostly entrepreneurs, and this is a  significant competitive advantage against potential competitors like banks and NBFCs who are hamstrung by a lack of credit history in this unique high yield market. The company is the largest player in this segment with 25% market share.</li><li>Low operating cost-key advantage: The company's operating expenditure is the lowest among its peers due to low employee and marketing expenses. The employee expense is low as multiple responsibilities are being handled by a single field agent and existing customer base provides enough referrals to avoid high marketing expenses. </li></ul>Regulatory policies and restructuring have affected performance in recent times The company’s gross NPA has increased significantly in  recent years, especially since FY15, due to the following factors<ul><li>RBI has made the Non-Performing Assets(NPA) recognition norms for the NBFCs much more stringent which will have an impact on Shriram's NPAs till FY18.</li><li>The company merged its equipment finance subsidiary –Shriram Equipment Finance(SEF) to Shriram Transport Finance in FY16 resulting in gross NPAs of the subsidiary to get transferred to the merged entity.</li></ul>However reducing provision coverage may offset the above concern going forwardShriram maintains a high Provision Coverage Ratio (PCR) of 70% of Gross NPA as on FY16. With the company moving towards a more conservative accounting of NPAs, we believe that it can opt for lower provision coverage, without compromising on the risk. The management expects to reduce the PCR to 60% of the Gross NPA by FY18e, which will still be significantly higher than the 25% PCR mandated by RBI.Valuation and OutlookWe expect Assets Under management to grow at a CAGR of 12% from FY16-FY19e. Profitability will likely fall through FY18e after which we expect a revival as all the regulatory risks will have been addressed.The company trades at a P/BV of 1.9x FY17e, 1.7x FY18e, and 1.6x FY19e. We believe that at the current price, the company is trading at a fair valuation as all the risks are are priced in. The near-term underperformance presents an opportunity for long-term investors as we believe that the company is an ideal candidate for the old adage " Buy good managements during bad times".

Shriram Transport Finance (SHTF IN) is one of the leading NBFCs in India with a focus on financing used commercial vehicles. The company is a market leader with near 25% market share in financing the used vehicle segment with the rest fragmented among banks, NBFCs and small unorganised players. The company with a track record of 30 plus years in this segment has created a niche positioning which is hard to replicate, by  establishing significant entry barriers. Strong management associated with it since inception and backing of deep pocket investors like Mr. Ajay Piramal of Piramal enterprise is an added advantage. Rrecent regulatory changes have affected performance adversly.We beleive these changes are transient,  and the resultant impact on account of these, will provide an opportunity for long term investors. Dominant Market Positioning Strong Customer Base: The company enjoys a strong customer relationship evident from the fact that nearly all the loan disbursals are to the existing customers having a long-term association with the company. Disbursal for new vehicles is also done to the existing customer base only.Deep credit history-significant entry barrier: The company has nearly 30 years of credit history of its customers who are mostly entrepreneurs, and this is a  significant competitive advantage against potential competitors like banks and NBFCs who are hamstrung by a lack of credit history in this unique high yield market. The company is the largest player in this segment with 25% market share.Low operating cost-key advantage: The company's operating expenditure is the lowest among its peers due to low employee and marketing expenses. The employee expense is low as multiple responsibilities are being handled by a single field agent and existing customer base provides enough referrals to avoid high marketing expenses. Regulatory policies and restructuring have affected performance in recent times The company’s gross NPA has increased significantly in  recent years, especially since FY15, due to the following factorsRBI has made the Non-Performing Assets(NPA) recognition norms for the NBFCs much more stringent which will have an impact on Shriram's NPAs till FY18.The company merged its equipment finance subsidiary –Shriram Equipment Finance(SEF) to Shriram Transport Finance in FY16 resulting in gross NPAs of the subsidiary to get transferred to the merged entity.However reducing provision coverage may offset the above concern going forwardShriram maintains a high Provision Coverage Ratio (PCR) of 70% of Gross NPA as on FY16. With the company moving towards a more conservative accounting of NPAs, we believe that it can opt for lower provision coverage, without compromising on the risk. The management expects to reduce the PCR to 60% of the Gross NPA by FY18e, which will still be significantly higher than the 25% PCR mandated by RBI.Valuation and OutlookWe expect Assets Under management to grow at a CAGR of 12% from FY16-FY19e. Profitability will likely fall through FY18e after which we expect a revival as all the regulatory risks will have been addressed.The company trades at a P/BV of 1.9x FY17e, 1.7x FY18e, and 1.6x FY19e. We believe that at the current price, the company is trading at a fair valuation as all the risks are are priced in. The near-term underperformance presents an opportunity for long-term investors as we believe that the company is an ideal candidate for the old adage " Buy good managements during bad times".

Shriram Transport Finance- Short Bumpy Ride to a Secular Growth Story.

Shriram Finance

Shriram Transport Finance- Short Bumpy Ride to a Secular Growth Story.