Shriram Finance Ltd. share price target

Shriram Transport Finance Company (SHTF) is the undisputed leader in the domestic used CV segment with 25-26% market share and outstanding AUM of INR900bn as on...

We met the management of Shriram Transport Finance (SHTF) and returned with renewed optimism on its business prospects. Over the past few years, while CV volumes have been stagnant, there has been a marked shift in mix towards higher-tonnage vehicles. In addition, price hikes in the past two years have been healthy (18-20% on new vehicles). While the addressable market size for SHTF in terms of volumes will remain largely stable, we believe better pricing and mix will drive disbursement and AUM growth. AUM is likely to grow 18-19% in FY18 as compared to the management's earlier guidance of 15% growth. We keep our FY18 AUM growth estimate of 18% unchanged,but modestly increase FY18-20E AUM CAGR to 17%

Q3FY18 PAT at Rs 5 bn (up 43% YoY) was in line with our estimate. AUM growth picked up further to 18% YoY and 5% QoQ on strong rural demand, higher agri output, pick-up in infra activity and shift towards higher-tonnage vehicles.

Shriram Transport Finance Company (STFC) has consistently been showing improvement on major operating front led by higher disbursement and higher operating profit. Its disbursement grew by 64.7% YoY and 8.1% QoQ to Rs133.8bn owing to strong growth in new CV financing and healthy growth in used CV segment. Consequently, AUM improved by 18% YoY and 5.3% QoQ to Rs900bn. Reported NIM on AUM remained almost stable at 7.5% QoQ (+31bps YoY) led by decline in cost of fund. As a result, STFC's operating profit grew by 18.3% YoY and 2.5% QoQ to Rs13.5bn. Further, asset quality remained stable at 120 days recognition, as gross and net NPA ratio stood at 7.98% and 2.45% in 3QFY18 vs. 8.06% and 2.5%, respectively in 2QFY18....

Maintain BUY with a TP of Rs 1,669 (2.75x Dec-19E ABV of Rs 607) SHTF continued to exhibit its dominance in the used CV space with yet another solid show. Disbursements hit an all-time high (+65/8% YoY/QoQ) driven by higher demand for new CVs. Lower provisioning (down 4% YoY) and better asset quality performance (GNPA down 8bps QoQ) led to a net earnings growth of 43% YoY. Sticky NIMs, (7.5%) despite the fall in yields was a positive surprise

SHTF had a good 3QFY18. The quarter was marked by strong AUM growth, margin expansion and stable asset quality. This biggest positive surprise in the quarter was AUM growth of 18% YoY -the highest in over 15 quarters. This was driven by 17% YoY growth in used CV loans and 26% YoY growth in new CV loans. Going product-wise, growth was largely driven by the M&HCV segment (20%+), while growth in passenger cars & tractors was modest. Disbursement growth of 65% YoY was very strong, despite the low base. Yield on AUM compressed 25bp YoY to 13.97%. This is explained partly by coreyield compression and partly due to higher share of off-BS assets. On the other hand, CoF was largely stable QoQ and down 50bp YoY ??? this drove 35bp YoY NIM expansion in the quarter.

CV sales augmented AUM growth (q-o-q) to 4.7% (Rs 85462.57 crs / $13076.5 m in Q2FY18 from Rs 81611.95 crs / $12606.5m). Share of new vehicle financing increased a tad bit to 10.1% last quarter from 9.9% in Q1FY18, while its core business used vehicle financing declined marginally by 47 bps to 86.6% of its total AUM to Rs 74013.90...

Also, we reiterate our stance that SHTF will be a big beneficiary of CoF reduction due to a large share of high-cost legacy borrowings. Thus, contrary to investor fears of a margin contraction due to rapid migration toward lower-vintage vehicle financing,...

SHTFs Q2 PAT of Rs 4.8 bn (up 24% YoY) was marginally ahead of our estimate, backed by lower than expected provisions. Asset quality was stable with 120-dpd GNPAs at 8.1%. Management continues to guide for GNPAs of 9.5% on transitioning to 90-dpd by Q4.