We upgrade Shriram Transport Finance to buy (earlier outperform), as its 31% share-price fall from its recent peak is overdone and continue to forecast an 18-20% ROE for FY14-16. A higher-than-expected rise in NPLs remains the key risk to our call.
However, we reduce our target price by 10% to R780 (earlier R871), reflecting our slower FY14 earnings growth forecasts, as we reduce our net profit forecasts by 7.1% for FY14 and 8.2% for FY15 to reflect higher provisions that we now expect.
Following its substantial NIM decline, we believe the priority is rising for the company to maintain its NIM at the current level of 7%, helped by three factors. Shriram Transport has not only raised its lending rates by 50 bps recently, but it also intends to become less aggressive in lending to the 2-5 year commercial vehicle (CV) segment (which has lower yields versus the 5-12 year segment) from Q3FY14 onwards. Also, it is likely to securitise a much larger amount of loans in Q2FY14 (versus Q2 in the prior two years).
While the market seems concerned about a slump in CV sales and further deterioration in Shriram Transports asset quality, we believe its fresh NPLs should remain under control in FY14-15.