Outlook Business — December 07, 2017

52

My Best Pick

22 December 2017 / Outlook BUSINESS

V

ery few companies can boast of

creating a franchise as powerful as

Shriram Transport Finance Com-

pany (SHTF), the fl agship company

of the Shriram Group and the largest asset fi nanc-

ing company in India with assets under manage-

ment (AUM) of # 85 , 500 crore. It has almost four

decades of experience in used commercial vehicle

(CV) fi nancing and is the market leader in the busi-

ness. The company has a strong and capable man-

agement team which has helped it withstand sev-

eral business cycles.

HITTING A BUMP

However, over the past fi ve years, the company

went through a pincer. Between 2012 and 2014 , fol-

lowing the ban on mining in several states, CV de-

mand was severely impacted. As the company was

slowly coming out of the downcycle, it was again

hit by the central bank’s new guidelines on non-

performing asset (NPA) recognition. All non-bank-

ing fi nancial companies had to move from 180 days

past due (dpd) non-performing asset (NPA) recogni-

tion to 90 dpd recognition over three years — FY 16 ,

FY 17 and FY 18. This resulted in not only NPAs in-

creasing sharply, but also impacting the NBFC’s in-

come statement, owing to interest reversals and in-

creased provisioning. As a result, since FY 11 , profi t

aft er tax for Shriram Transport Finance has been

range-bound between # 1 , 100 crore and 1 , 300 crore.

BACK ON TRACK

However, we now believe the company is on the

cusp of a strong earnings trajectory over the next

three years. Our thesis is based less on the overall

CV market recovery and more on company-specifi c

factors that shall drive this earnings growth. We

believe that SHTF will be a big benefi ciary of reduc-

tion in its cost of funds, comprising a larger share

of high-cost legacy borrowings.

A quick analysis of its liability profi le suggests

that the company is still bogged down by high-cost

legacy non-convertible debentures (NCDs). Hence,

while incremental cost of borrowings via NCDs is

around 8 %, the company still has a high share of

NCDs outstanding that cost over 10 %. For exam-

ple, in FY 16 , only 51 % of the privately placed re-

deemable NCD of # 1 lakh each were at a cost of less

than 10 %. In FY 17 , this number increased to 75 %

as high-cost NCDs were refi nanced at much lower

rates. We expect such refi nancing to continue over

the medium term, and this should result in healthy

interest cost savings for the company. In FY 17 , its

cost of funds was 9. 8 %. With incremental borrow-

ings at 8 %- 8. 5 %, we expect at least a reduction

of 100 bps in the cost of funds over the medium

term. As a result, contrary to investor fears of a

margin decline owing to increased migration to-

wards lower-vintage vehicles, we believe that mar-

gins will remain steady (and can even improve),

even if there is some migration towards fi nancing

of lower-vintage vehicles.

Burdened by the past

Shriram’s fund cost is higher due to legacy borrowings

Trend in cost of borrowings of SHTF v/s peers (%)

SHTF Mahindra & Mahindra Financial Services

Cholamandalam Investment Finance Company

12

11

10

9

8

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2016 2017 2018

Source: Company, MOSL

Note: Market related data as on December 1, 2017; Financials

for FY17; Consolidated fi nancials considered wherever ap-

plicable

Data: Ace Equity

net sales#10 ,903cr

stock price# 1327 M-CAP #30 , 112cr

ROE 11.78%