To sustain ~7 percent NIM in FY23– Shriram Transport FinanceTanmay Gadre
Update on the Indian Equity Market:
On Thursday, NIFTY closed at 16,478 (+0.7%) near its intraday high of 16,493 level. Among the NIFTY 50 stocks, DRREDDY (+3.0%), BPCL (+2.8%), and RELIANCE (+2.6%) led the gainers while TATASTEEL (-4.2%), SHREECEM (-2.0%), and GRASIM (-1.6%) led the losers. Among the sectoral indices, OIL & GAS (+2%), HEALTHCARE (+1.3%), and PHARMA (+1.2%) led the gainers, while METAL (-1.3%), and PSU BANK (-0.3%) were the only losers.
Excerpts of an interview with Mr. Umesh Revankar, Vice-Chairman and Managing Director at Shriram Transport Finance (SRTRANSFIN) with CNBC TV18 on 9th June 2022:
- The down cycle of commercial vehicles started 4 years ago. Mr. Revankar believes that currently, the industry is in an upcycle which will continue for the next 3-to 4 years.
- New vehicle price hikes limited the industry’s growth scope last year. Going forward, there will be a gradual increase in the cycle instead of a steep increase due to geopolitical aspects, and higher fuel cost considerations.
- The government’s goal is to build long-term logistics infrastructure and road transport which will create a demand for commercial vehicles in the next 3-4 years. This will work in favor of the transport industry.
- Most of the company’s borrowing has a tenure of 2-4 years. Its cost of borrowing was higher 2 years ago compared to right now. The company is now borrowing its loans at much lower rates than 2-3 years ago.
- The company believes that the RBI’s repo rate hikes won’t impact it much and that any increase in the borrowing costs can be easily passed on to its customers without losing any credit demand.
- The company believes that it can sustain the NIM (net interest margin) of 7% from 4QFY22 even in FY23.
- Fuel cost is 40% of the operational cost for the company of running a vehicle. Transporters either pass it to end-users or manufacturers and don’t bear any of these costs. In case of low demand, and higher vehicle supply, the transporters have to bear the costs and take a margin hit.
- He believes that the demand for transporters has been robust and the transporters are not facing any challenge in passing on the fuel costs.
- He believes that there is a good demand for vehicles in rural areas. The demand had dampened in between due to the increase in prices of vehicles. As the prices of the output of Rabi crop, wheat, and oil have increased, it has benefitted the farmers in the rural areas. So now, the people have adjusted themselves to the higher-priced vehicles.
Asset Multiplier Comments
- We believe that the company is bound to benefit from the economic activity rebound which will drive demand and cyclical recovery in new CVs.
- With the current provisions at 7.2% (Provision Coverage Ratio at 50%), we expect loan loss provisioning to normalize at ~2% levels.
Consensus Estimates (Source: market screener website)
- The closing price of SRTRANSFIN was ₹ 1,170/- as of 09-June-2022. It traded at 8x/ 7x the consensus earnings estimate of ₹ 146/ 162 for FY23E/FY24E respectively.
- The consensus target price of ₹ 1,495/- implies a P/E Multiple of 9x on the FY24E EPS estimate of ₹ 162/-.
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