Shriram Transport Finance – Review

Shriram Transport Finance (SHFT) reported earnings were 13% above our estimates (net profit of Rs2.64bn in 4QFY10, 72% yoy growth), both in terms of quality and quantity. NII growth came in at 45% yoy, driven by expansion in NIMs (on average AUM) by 100bp yoy and 46bp qoq, and AUM growth of 25% yoy.

SHFT is attempting to move towards a business model, whereby they leverage their niche franchise to grow faster by securitizing higher proportion of their assets (38% of AUM vs. the usual 20-24%), given banks’ appetite for their priority sector needs. Consequently, SHFT’s loan book declined by c.17% qoq.

Shriram Transport Finance is expected to report an EPS of Rs 51.68 & 65.24 for fy 11 and fy 12 respectively. It is trading at 2.6X FY11E BVPS and 10.9X FY11E EPS. This model will result in an RoE accretive business (currently 28-30%) with less frequent need for SHFT to tap capital markets (done each year over the past 5 years). Goldman has set a Target Price of Rs 650 on the stock with a BUY recommendation. FII ownership in the company has reached 26.5%.