Shriram Transport Finance (SHTF) is an undisputed leader in niche business of commercial vehicle (CV) financing (primarily used CVs), with R53,000 crore of AUM. However, adverse regulatory changes and prolonged economic slump aggravated by mining bans took a heavy toll on SHTF— RoA dipped from 3-3.5% in FY10/11 to 2.2% in FY14. But, at this juncture, it is our preferred pick to play the much-anticipated economic recovery.
Our FY14-16E PAT CAGR of 31% is 13% ahead of consensus given: (1) economic upturn benefits CVs the most, which portends growth; (2) truck operators’ improving profitability (better volumes and freight rates) will lower credit costs from a high of 1.8% to 1.1%; and (3) higher demand for PSL and with elimination of the regulatory overhang, securitisation income will form a healthy 2.6% of AUMs. Culmination of these vectors will propel RoA/RoE to 2.9%/20% plus and valuations to 2.5x P/ABV FY16E. We initiate coverage with ‘buy’ and target price of R1,248 (30% upside). SHTF, being the pioneer in pre-owned CV financing, has now institutionalised its expertise in loan origination, valuation and collection. Business and franchise created over the past three decades is not easily replicable posing a strong entry barrier to banks/NBFCs and providing strong pricing power.