Seeing demand uptick for second-hand CVs- Shriram Transport Finance

Seeing demand uptick for second-hand CVs- Shriram Transport Finance

Update on the Indian Equity Market:

On Thursday, NIFTY closed in the red at 17,746 (-1%) near its high of 17,795. Among the sectoral indices, MEDIA (+0.9%), AUTO (+0.5%), and CONSUMER DURABLES (+0.5%) closed higher while IT (-1.5%), REALTY (-1.5%), and FINANCIAL SERVICES (-0.9%) closed in the red. Among stocks, UPL (+2.2%), INDUSINDBK (+1.8%), and BAJAJ-AUTO (+1.7%) were the top gainers while JSWSTEEL (-3%), ULTRACEMCO (-2.7%), and SHREECEM (-2.6%) were among the top losers.

Excerpts from an interview of Mr. Umesh Revankar, Vice Chairman & Managing Director, Shriram Transport Finance Corporation (SRTRANSFIN) with CNBC-TV18 dated 5th January 2022:

  • The demand for CV is increasing but not at the expected levels as the economy is not recovering as much as it was expected to. As a result, new CV (commercial vehicles) sales are lower than expectations.
  • Light Commercial Vehicles (LCVs) are showing good demand but it’s not as expected for heavy vehicles. However, demand for used vehicles is good.
  • The resale values have gone up significantly by 15-20% over the year and this reflects that people prefer to buy used vehicles in the current market situation rather than choosing a new vehicle. This eventually works for SRTRANSFIN and they are confident that as the market heats up, as the resale value goes up beyond 20%, eventually demand will come back.
  • The Omicron spread has increased in the last one week but they are not seeing any impact as such even though the city traffic has slowed down a bit. SRTRANSFIN hasn’t seen any downfall in Commercial Vehicle transportation even though mobility had come down in December. Overall, the long-distance movement has increased and hence the CV transportation has not seen any challenge as compared to what was seen in wave 2.
  • Revankar doesn’t expect many challenges as the covid variant is not supposed to be as strong and more people are getting vaccinated.
  • Marginal growth in disbursement can be expected on a QoQ basis and the AUM will be around 10% for FY22E. Larger growth in AUM is expected in FY23E because economic activities will reopen and demand for infrastructure will lead to a huge demand for heavy commercial vehicles and construction equipment.
  • As far as freight rates are concerned, margins for customers have improved because there was some decrease in the excise duties and the fuel prices had come down. Hence there were temporarily higher margins for customers. However, freight rates got corrected as they are linked to fuel prices and are a contractual obligation. But overall margins for truckers have remained strong.
  • Collections have been more than 100% in December. Hence, this shows that business is viable.
  • Revankar doesn’t look at GNPAs of 8% as a problem since the kind of customers they are lending to are individual operators who have to earn and pay. Hence there will be some delay in their collection. Individuals depend on corporates or entities for timely payments.
  • Credit cost for the long term is 2% on average and they are comfortable as long as it stays around 2%. So the GNPA is not an indicator for stress levels in their portfolio.
  • In terms of Net Interest Margin (NIM), SRTRANSFIN has always been eyeing a rate of 7% which has come down to 6.45% due to the higher liquidity they are carrying on their balance sheet due to the ongoing uncertainty in the market. Margins will move towards 7% once there is more certainty in the market.
  • Credit costs have been hovering around 2.5% due to the higher provisioning done in the last year. By March FY22, SRTRANSFIN hopes to bring down credit costs from last year’s mark of 2.48%

Asset Multiplier comments:

  • The company delivered good results in the impacted part of 1HFY22.
  • CV demand is gaining momentum and the company is the largest player in this space.
  • Appropriate provisioning, improving asset quality and strong growth strategy may contribute to the SRTRANSFIN’s topline.

Consensus Estimate: (Source: Market screener website and Tikr)

  • The closing price of Shriram Transport Finance Corporation was ₹ 1,216 as of 5-January-2022. It traded at 1.3x/1.1x/0.9x the consensus Book Value per share estimate of ₹ 968/ 1,087/ 1,219/- for FY22E/FY23E/FY24E respectively.
  • The consensus average target price is ₹ 1,660/- which implies a PB multiple of 1.4x on FY24E BVPS of ₹ 1,219/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

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