Buy Shriram Transport Finance Company, target Rs 1,951: Edelweiss Financial Services

Edelweiss Financial Services has a buy call on Shriram Transport Finance Company with a target price of Rs 1,951.

The current market price of Shriram Transport Finance Company is Rs 1,571.1.

Time period given by the brokerage is Long Term when Shriram Transport Finance Company price can reach the defined target.


Investment rationale by Edelweiss Financial Services
Catalysts in place to drive nearly 18 per cent AUM spurt over FY17-20E: The CV industry is estimated to clock a stellar 13 per cent growth over FY17-20E led by: a) accelerating IIP; b) improving road connectivity & last mile delivery by e-commerce companies; c) rising road construction boosting demand for higher tonnage trucks; and d) burgeoning farm output & doubling of farmersf incomes by FY22. Moreover, the pre-owned CV financing industry is pegged to grow at nearly 15 per cent over FY17-20E on back of 13 per cent spurt in new CV at OEM level and nearly 11 per cent growth in pre-owned CV sales. These catalysts, in conjunction with SHTFfs sharpening rural focus (high yield business), are estimated to boost the companyfs AUM nearly 18 per cent over FY17-2.0

Deteriorating asset quality on the mend: SHTFfs asset quality has deteriorated significantly over the past few years due to: a) mining ban in Goa; b) transition from 180dpd to 120dpd for GNPA recognition over FY16-18E; and c) demonetisation & GST. However, incremental slippages over the past few quarters have moderated and we expect asset quality to improve in the near to medium term post completion of the transitory phase. We expect net slippage to stabilise at .70bps onward FY18E. Consequently, GNPA is estimated to improve from 9.3 per cent in FY18E to 7.9 per cent by FY20E.

Return ratios to improve on account of decelerating credit cost: SHTFfs RoA/RoE declined from nearly 4 per cent/28 per cent in FY11 to 1.8 per cent/12 per cent in FY17 due to higher credit cost. We estimate nearly 300bps credit cost in FY18E and 240bps and 220bps in FY19E and FY20E, respectively due to a) completion of migration from 120dpd to 90dpd by March 2018 and also improving earnings of truck operators as utilisation of trucks rises significantly will lead lower slippage. Hence, we expect RoA and RoE to jump to 2.6 per cent/19 per cent over FY17-20E.

Outlook and valuations: On the fast track; initiate with ‘BUY’: At CMP of INR 1,568, we initiate coverage on the stock with a ‘BUY’ recommendation. At CMP, the stock is trading at 2.6x/2.2x FY19E/FY20E ABV and 15x/12x FY19E/FY20E earnings respectively. We believe the moderating credit and operating cost will increase the RoA/RoE from 1.8 per cent/12 per cent to 2.6 per cent/19 per cent over FY17-20E, will lead to valuation multiple expansion. Based on residual income model, we arrive at a target price of INR 1,951, implying an upside of 25 per cent.