Company Name – Shriram Transport Finance Company Limited (STFCL) Current Share Price – INR 1,447 (December 3, 2021) Market Cap – INR 39,148 cr |
1. What is interesting about the stock?
India is a large country with a widely dispersed population who live in urban centers and rural areas. Over the last four decades, India’s rapidly industrializing economy has led to high urbanization. With centers of consumption different from the places of production, India’s logistics industry plays an important role in bridging the production and consumption gap. Goods move across the country, within the state and also within a city. With an extensive road network, commercial vehicles (CVs) play an important role in the movement of these goods across the country. According to Niti Aayog’s Report ‘Fast Tracking Freight in India, June 2021’ India’s logistics sector comprises over 10,000 types of products and has a market size of INR 11 lakh cr. Approximately, 80% of this freight is transported on road through CVs.
Shriram Transport Finance Company Limited (STFCL), established in 1979, is India’s premier pre-owned CV financier, one of India’s largest deposit taking NBFCs having an asset under management (AUM) of INR 1,21,647 cr as on Sep 30, 2021. With an almost four decade long experience and a network that stretches across India with more than 1,800 branch offices, STFCL has built a strong brand name in the CV financing business and has more than 20 lakh customers. Having built a large network of branches and a pool of existing customers, STFCL has also ventured into segments that include construction equipment loans and tractor financing loans.
STFCL is India’s leading organized sector CV financier with a strategic presence of financing 5-10 year old pre-owned CVs with loans to this segment comprising c.74% of its total AUM. STFCL’s target segment includes commercial vehicle owner cum drivers having a small number of trucks, usually not more than 5 and underdeveloped banking habits. The target segment is primarily financed by from the unorganized sector who control 55%-60% of the total market. Private financiers operate without having access to large and mainstream sources of liquidity such as deposits from members of the public and bank borrowings, which places them at a disadvantage compared to large NBFCs like STFCL. This presents an opportunity for STFCL, as they are able to capitalize on their access to formal credit markets and offer loans to CV owners at more favorable rates and repayment terms, compared to the unorganized sector.
STFCL gives loans to owners of CVs and these loans primarily get impacted in times of low GDP growth. As we have seen during the pandemic, the demand for goods and services got impacted due to lockdowns which led to lower economic activity and also reduced consumption of non-essential goods and services. The repayment of these loans got impacted due to the reduced earning capacity of the underlying CVs, usually resulting in delayed payments and longer repayment schedules.
India’s Union Budget for 2021-22 proposed a voluntary Vehicle Scrappage Policy (VSP) aimed at phasing out CVs and passenger vehicles (PVs) older than 15 and 20 years, respectively. The policy is primarily encouraging fuel-efficient, environment-friendly vehicles, thereby reducing vehicular pollution and the reliance on imported crude oil which impacts the country’s Balance of Payments. Under the policy, any CV older than 15 years will have to undergo a fitness test and if found unfit will have to be mandatorily scrapped. For a PV, this period is 20 years. Also, vehicles belonging to the Central and State Government, that are more than 15 years old, shall be mandatorily scrapped from April 1, 2022. Increased testing and costs associated with the VSP, and scrapping of Government vehicles and CVs older than 15 years, might lead to a lower demand for used CVs ad hence could impact STFCL business.
2. Key Historical Financials
Net Interest (NI) has remained consistent at c.50% of the total revenue. Revenue growth has been slow in FY 2020 and FY 2021 at approximately 7% and 5% respectively. AUM of grown from INR 1,09,750 cr to INR 1,17,240 cr in FY 2020 and FY 2021 respectively.
PAT has almost remained constant at ~INR 2,500 cr in FY 2021 as compared to INR 2,510 cr in the previous year. However, PBT has declined marginally in FY 2021, primarily on account of an increase in loan loss provisions of INR 324 cr due to the impact of the pandemic lockdowns. The quicker recovery and subsequent growth in consumption might surprise positively and lead to a write-back in the subsequent quarters.
3. What is my view on company valuation?
Currently, the shares are trading at INR 1,447, PE (TTM) ratio of 16.1x (5 year PE ratio of 12.8x). Among its peers, Cholamandalam Investment Finance Company has a PE (TTM) of 30.1x.
While the share price of STFCL has increased by almost 47% over the last one year, the increase has not been supported by an increase in the EPS. We think that the valuation is on the higher side with the current multiple is ~25% higher than 5 year PE ratio.
Any further lockdown due to the Covid-19 pandemic may also impact business activity in India, which can lead to lower earning capacity of the CVs and impact the recovery of collections of the loans given by STFCL.
4. What are the risks to the investment analysis?
Key risks are:
CV sales in India has declined from 10.7 lakh vehicles in FY 2019, to 7 lakh vehicles in FY 2020, further to 5.6 lakh in FY 2021. For the first half of FY 2022 the CV sales were 2.7 lakh. While sales of CVs have dropped by c.50% from 2019 levels, we are of the opinion that STFCL is best poised to capitalize on the growth of this segment back towards higher levels seen during FY 2019
With the increase in the Government of India’s (GOI) spending on infrastructure and increasing emphasis on rural connectivity along with the replacement demand that is likely to be generated once the VSP comes into force, CVs being sold in India will see an upward trend from FY 2022 - 23 onwards
Digitization of their business leading to higher efficiencies and lower costs can generate additional multiples of growth
About the Author
I am a Chartered Accountant and I have more than 18 years of experience in Corporate and Investment banking working in Financial Institutions in South and South East Asia.
Disclosure
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
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