Buy Shriram Transport Finance, target Rs 1,220: Yes Securities
Shriram Transport Finance is a largecap company operating in finance sector.
Shares of Shriram Transport Finance Company closed at Rs 1,030.85 on 9 May, 2019. The brokerage has set a one-year horizon for the stock to hit the target price.
March quarter highlights:
- As per the brokerage, STFC's operational performance in the fourth quarter of financial year 2018-19 was below Street’s expectations as asset growth dropped significantly and margins dipped to multi-quarter low.
- Composite AUM was flat, even as disbursements partially recovered from a depressed base of Q3FY19.
- Against the management’s expectation of 15 per cent AUM growth, STFC delivered just 8.5 per cent growth during the year as of early February.
- Within business segments, the growth slowdown was more visible in new vehicle financing segment, whereas used vehicle financing has exhibited relative resilience as typically seen in the previous cycles.
- Though growth deceleration was seen across products, it was prominent in HCV, passenger cars and tractor loans.
- Demographically, the sharp divergence in the performance of rural and urban markets continued. Rural asset growth was strong at 4 per cent quarter-on-quarter (QoQ) and 24 per cent year-on-year (YoY), driven by management’s focus on adding distribution strength in the form of branches and centers.
- NIM contracted by 20bps QoQ to 7.2 per cent. Reliance on CPs was reduced further during the quarter.
- STFC’s asset quality improved in Q4 FY19, reflecting the resilience of its customers who are one or few vehicle owners. The company’s collection efficiency has held-up so far, as there hasn’t been significant idling of vehicles.
- Gross NPLs (as per I-GAAP) declined 7 per cent QoQ, with its proportion falling to 8.3 per cent. Positive movement in NPLs coupled with improvement in ECL assumptions led to lower credit cost in Q4 FY19.
The brokerage expects STFC to deliver 14-15 per cent AUM growth in FY20, which would be back-ended. The growth is likely to moderate materially in FY21 as CV cycle enters a weaker phase, having been reasonably strong since FY16.
"Traditionally used CV demand has been less cyclical, and STFC’s growth susceptibility has been moderate as compared to other listed peers. Against management’s expectation of 2-2.1 per cent credit cost, we build a higher credit cost for FY20 and a further increase in FY21 reflecting a likelihood that credit cycle may encounter challenges thrown-up by weakness in growth cycle," said the brokerage.
"Overall, we expect STFC to deliver a sedate 10-12 per cent earnings CAGR over FY19-21. A better-than-expected monsoon and significant bounce-back in economic activity represent upside risks to our estimates," the brokerage added.
As per the brokerage, the stock’s valuation at 1.1 times P/BV and 7.5 times PE on FY21 basis largely discounts a muted earnings growth scenario for the next couple of years, and thus further price erosion should be limited and transient too, if above mentioned upside triggers play out.