CRISIL-Research_ier-Report-Shriram Transport Finance Company Ltd_2013

8/13/2019 CRISIL-Research_ier-Report-Shriram Transport Finance Company Ltd_2013

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CRISILIERIndependentEquityResearch

Enhancing investment decisions

Shriram TransportFinance Company Ltd

Initiating Coverage


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Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making processAnalysis

of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a

five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a five-

point scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISILFundamental Grade Assessment

CRISILValuation Grade Assessment

5/5 Excellent fundamentals 5/5 Strong upside (>25% from CMP)

4/5 Superior fundamentals 4/5 Upside (10-25% from CMP)

3/5 Good fundamentals 3/5 Align (+-10% from CMP)

2/5 Moderate fundamentals 2/5 Downside (negative 10-25% from CMP)

1/5 Poor fundamentals 1/5 Strong downside (


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Shriram Transport Finance Company LtdLeader in pre-owned commercial vehicle financing

Fundamental Grade 5/5 (Excellent fundamentals)

Valuation Grade 4/5 (CMP has upside)

Industry Consumer finance

1

December 18, 2013

Fair Value 726

CMP 632

For detailed initiating coverage report please visit: www.ier.co.in

CRISIL Independent Equity Research reports are also available on Bloomberg (CRI ) and Thomson Reuters.

Shriram Transport Finance Company Ltd (Shriram Transport) is Indias leading non -banking

financial company (NBFC) with strong competitive advantages in pre-owned commercialvehicle (CV) financing (especially five-12 year old vehicles). A relationship-driven business

model, expertise in valuing pre-owned vehicles and deep local knowledge have ranked it as a

leader in pre-owned vehicle financing. Shift in focus towards financing newer pre-owned

vehicles (two-five year old) and small CVs coupled with increase in rural penetration is

expected to boost assets under management (AUM). However, these initiatives will also put

pressure on its NIM which could lead to lower RoA/RoE. We initiate coverage on the

company with fundamental grade of 5/5indicating excellent fundamentals.

Strong competitive edge and track record in pre-owned CV financing

Shriram Transports leadership position in pre-owned CV financing (25% market share) is

rooted in its strong customer relationships, expertise and experience in pre-owned CV

valuation and strong local intelligence. Given that it lends primarily to small road transport

operators (SRTOs) and first-time users (FTUs), who have low credit profile and may not have

a number of necessary documents, these expertise gain significance. The companys AUMhas recorded strong 35% CAGR over the past decade while maintaining credit costs at

manageable levels.

Rural initiatives and newer products/business to drive growth

The company is increasing its rural reach to capture the increase in penetration of CVs in

rural areas driven by better road infrastructure and higher goods demand due to rising

incomes. We expect the rural initiatives and faster growth in financing of newer segments

such as small CVs, tractors, passenger vehicles and construction equipment to drive AUM

growth. CRISIL Research expects Shriram Transports AUM to grow at 16% CAGR over

FY13-15 to 706 bn.

Focus on new vehicles, rural push to affect NIM/RoE

While Shriram Transport is a dominant player in five-12 year old CV financing, it faces

competition from other NBFCs and banks in the two-five year old CV financing segment

which also has lower yields. Segments such as small commercial vehicles (SCVs) andtractors, where it plans to focus, also have lower LTVs, resulting in higher operating costs. Its

rural initiatives may also put pressure on operating costs. The companys NIM moderated

from 8.4% in FY11 to 7.4% in FY13. We expect NIM to stabilise at 7.0-7.1% and RoE at 18.2-

18.3%

Regulatory norms are a monitorable

The notification of 90+ dpd NPA classification norms (currently 180+ dpd) will increase the

provisioning requirement for Shriram Transport. Further changes in regulatory norms are a

monitorable.

Valuations: Fair value of 726 per share

We have valued Shriram Transport at 1.5x P/B multiple. Our fair value is 726 per share. At

the current market price of 632, our valuation grade is 4/5.

KEY FORECAST(mn) FY11 FY12 FY13 FY14E FY15E

Total operating income 30,784 35,108 37,854 42,523 49,870

Pre-provision profit 23,016 26,538 29,140 32,506 37,957

Adjusted net profit 11,512 12,181 13,256 14,471 17,085

Adj EPS () 51 54 58 64 75

Adj. BV ( per share) 211 260 310 365 427

P/E (x) 12.4 11.7 10.8 9.9 8.4

P/ABV (x) 3.0 2.4 2.0 1.7 1.5

RoA (%) 4.0% 3.7% 3.2% 2.9% 2.9%RoE (%) 26.6% 22.5% 19.9% 18.2% 18.3%

Credit costs (%) 1.6% 1.9% 1.8% 1.9% 1.9%

Capital adequacy ratio (%) 24.9% 22.3% 20.8% 20.6% 20.6%

Source: Company, CRISIL Research

CFV MATRIX

KEY STOCK STATISTICSNIFTY/SENSEX 6,217/20,860

NSE/BSE tickerSRTRANSFIN/

STFC

Face value ( per share) 10

Shares outstanding (mn) 227

Market cap ( bn)/(US$ bn) 143 / 2

52-week range ()/(H/L) 843/464

Beta 0.9

Free float (%) 74%

Avg daily volumes (30-days) 348,956

Avg daily value (30-days) ( mn) 205NIFTY/SENSEX 6,217/20,860

SHAREHOLDING PATTERN

PERFORMANCE VIS--VIS MARKET

Returns

1-m 3-m 6-m 12-m

Shriram Transport 10% 10% -19% -15%

CNX 500 2% 7% 4% 1%

ANALYTICAL CONTACTMohit Modi (Director) [email protected]

Ankit Hakhu [email protected]

Vishal Rampuria [email protected]

Client servicing desk

+91 22 3342 3561 [email protected]

1 2 3 4 5

1

2

3

4

5

Valuation Grade

FundamentalGrade

PoorFundamentals

ExcellentFundamentals

Strong

Dow

nside

Str

ong

Upside

25.8% 25.8% 25.8% 25.9%

49.7% 49.5% 49.7% 49.7%

5.3% 5.1% 5.3% 5.5%

19.1% 19.7% 19.1% 18.8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Dec-12 Mar-13 June-13 Sep-13

Promoter FII DII Others
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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2

Table 1: Shriram Transport - Business environment

Used commercial vehicle financing New commercial vehicle

financing

Construction Equipment

Products offerings/market

segmentation

Financing of used vehicles mainly

aged between five and 12 years

Catering to driver-turned-operators

(DTOs) and SRTOs

Financing of tyres, ancillary equipment

Mostly finances new vehicle

buying by existing customers

Financing of new and pre-

owned commercial equipment

viz. forklifts, cranes, loaders

AUM (FY11) ( bn) 273 88 6.3

AUM (FY13) ( bn) 398 95 30

AUM (FY15E) ( bn) 550 106 43

AUM growth CAGR FY11-13 20.9% 3.9% 119%

AUM growth CAGR FY13-15 17.5% 5.7% 18.7%

Typical LTVs 50-60% 70-75% 80%

Typical yields two-five years : 15%-16%

five-12 years : 18%-24%14-16% 16-18%

Key growth drivers Growth in used vehicle population

Gain in market share from

unorganised players

Increase in vehicle prices and LTVs

Growth in sales of new CVs,

which in turn is linked to

macro-economic factors

Growth in the construction

sector

Competitors five-12 years:Unorganised players

two-five years :Indus Ind Bank,

Cholamandalam, Magma Fincorp

Private sector banks:Indus

Ind Bank, HDFC Bank, ICICI

Bank

NBFCs: Sundaram Finance,

Cholamandalam Finance,

Magma Fincorp

Captive financer:Tata

Motors Commercial Vehicle

Finance, Mahindra Finance

NBFCs: L&T Finance, Magma

Fincorp, SREI Infrastructure



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Shriram Transport Finance Company Ltd

3

Grading Rationale

Leading financer in pre-owned CV financing market

With AUM of 527 bn, Shriram Transport is a leading asset financing NBFC. The company

has created a niche for itself in financing pre-owned CVs (76% of AUM as on March 31,

2013). It has around 25% share (as per the management) in the pre-owned CV financing

market which is mostly dominated by unorganised private financers. It primarily finances FTUs

and SRTOs who have low access to normal banking channels due to lack of credit history and

inadequate documentation availability (such as tax returns and bank statements). The

company has recorded high growth in this segment - AUM CAGR of 35% over FY03-13) -

while managing its asset quality. CRISIL expects the company to be able to maintain its

leading position in the pre-owned CV financing market owing to competitive advantages such

as:

Expertise in valuation of pre-owned vehicles

Strong relationships with its customers

Local intelligence and knowledge

The company also finances new CVs but largely caters to existing customers who want to

upgrade to new vehicles. It has 5-7% market share in this segment which is dominated by

private sector banks and NBFCs. The company has recently (FY10) started construction

equipment financing through its wholly owned subsidiary. It has also started providing services

for buying-selling pre-owned vehicles (through its wholly owned subsidiary), tyre financing, bill

discounting and other related services. While we expect these segments to aid growth, the

focus of the company will remain on pre-owned CV financing where it is a dominant player

and has strong competitive advantage.

Only large player in this unorganis ed market

The pre-owned CV financing market is largely unorganised; Shriram Transportis the only large

player in this segment. While other NBFCs and banks have a small presence, they mostly

finance newer pre-owned CVs (two-five year olds). The high risk nature of this segment has

largely kept the organised players away from this market. The risks of catering to this segment

arise from the following:

a) Inability to track financial position of borrowers:Since most of the customers are not

entrenched in the financial system (lack of income tax statement, bank statements) the

ability to track their financial health and existing leverage is difficult. As a result, the

hypothecated vehicle is the only collateral available.

b) Ability to value pre-owned vehicles: Value of pre-owned vehicles is determined by

multiple factors such as model, vintage, plying route, wear and tear, accessories, etc.

Further, difficulty in valuation increases as the vehicle ages. Valuation is critical in

determination of LTVs.

c) Mobility of borrowers: Since the borrower and the collateral (vehicle) are highly mobile,

tracking of the same and repossession may become an issue.

Source: Company

ShriramTransport

22%

Otherorganised

financers8%

Unorganised f inancers

70%

Indias leading asset financing NBFC


162

190

176

238

527

175

171

158

- 100 200 300 400 500 600

Magma Fincorp

Cholamandalam Finance

Sundaram Finance

Mahindra Finance

Shriram Transport Finance

Bajaj Finance

Kotak Mahindra Prime

Shriram City Union

( bn)


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4

d) Repayment dependent on income generation: Various local and macro factors may

affect revenue generation from the financed vehicle which can impact the repayment of

loans.

Figure 1: Pre-owned CVS - operating and financing dynamics


With strong valuation expertise

As mentioned, since pre-owned CVs are generally used by customers with a weak credit

profile, the hypothecated vehicle is the only collateral available with the financer. As a result,

valuation of the vehicle and determination of LTVs are critical to ensure recovery of loan in

case of default. Shriram Transports ability to value pre-owned vehicles gives it a competitive

advantage over other organised players and its access to low-cost funds helps it effectively

compete with unorganised players. The companys ability to value pre-owned vehicles is

rooted in:

Vast experience and track record in financing of pre-owned vehicles which has helped it

developed strong understanding, experience and knowledge of vehicle valuation.

0-5 years 5-9 years 9-12 years >12 years

Typical route of

plying

Long haul

National Highway

Medium Haul

Interstate Transport

Short Haul

Intercity Transport

Last Haul

Local

Transportation

Competition

in

Financing

High to moderate

competition

(HDFC Bank, Indus

Ind bank, ICICI

Bank, Cholamandal

am, Sundaram, Mag

Moderate-to-low

competition

(Shriram

Transport, Magma

Fincorp, Cholamand

alam)

No competition

(Shriram Transport

and private

financers)

Finance Not

Available

Typical plying

distance>800 KMS 350-800 KM 50-350 KM

Age-wise mix of goods M&HCV (ex-Tippers)

in India


10%

19%

19%

26%

8%

8%

10%

0%

20%

40%

60%

80%

100%

New vehicles 1-2 years 3-5 years 6-9 years

Shriram's core segment

Venturing into this segment

Caters only to existingcustomers in this segment


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5

The automall which acts as a platform for buying and selling used CVs via auctions, and

helps the company in understanding market valuation for pre-owned vehicles.

Our industry checks indicate that the valuation of pre-owned CVs becomes more complex as

the vehicles age. While other NBFCs and banks have been able to gain knowledge in

financing two-five year old CVs, they still lack the ability to value older vehicles. Shriram

Transport has strong expertise especially in five-year+ old vehicles.

and a relationship-dr iven business model w hich ensures repeat

business, monitor ing of assets

Shriram Transport has developed strong relationships and customer base within the truck

community. The company operates on a relationship-based model.

Each product executive is assigned 100-150 customers. He takes care of credit

assessment, collections and caters to their future needs.

He caters to all the financing needs of truck operators such as tyre financing, credit cards

for diesel and bills discounting, which not only generates additional business for Shriram

Transport but also helps keep a check on overall leverage of the borrower.

He handholds the customers in times of distress and allows them to carry out part

payment of EMI in case of shortfall of cash flows.

Two of Shriram Transports existing borrowers are required to give guarantee for a new

borrower/customer.

These practices help the company develop strong customer loyalty. Nearly 20% of its yearly

disbursements are to the existing customers. The company has developed strong base of

over 1.0 mn (as of June 2013) customers which helps it generate repeat business. The

company has linked the performance incentives of product executives to the collections which

enables it in managing asset quality. Such business model is also prone to scalability issues;

however Shriram Transport has been able to manage the same.

Tie-up with pr iv ate f inancers helps in bus iness sou rcing and generates

local intel l igence

Shriram has entered into partnership and co-financing arrangement with over 500 private

financers. Under this agreement, the partner helps in sourcing of business and prepares all

the necessary documentations for loan approval and disbursement. Incomes (net of funding

costs) as well as losses, if any, are shared between the company and the partner in same

proportion. These tie-ups help the company gain and leverage local intelligence and

personnel base of the partner/private financer.

Demonstrated track record of growth while managing assetquality

Since Shriram Transport started operations in 1979, it has developed strong expertise in

lending against pre-owned CVs to borrowers with weak credit profile. The companys loan

book has grown at strong 10-year CAGR of 35% to 527bn in FY13. Growth has largely been

driven by the pre-owned vehicle segment. Also, passenger vehicles, small CVs and three

Product executive establishes strong

relationship with the customers and

is responsible for credit assessment,

collections, business sourcing for the

customers


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6

wheelers have aided its growth over the past four-five years. While the company operates in a

relatively high risk segment it has been able to manage its NPAs and credit costs well.

Figure 2: Strong growth in AUM over past decade Figure 3: while managing NPAs and credit costs

Source: Company, CRISIL Research Source: Company, CRISIL Research

Figure 4: Expansion in branch network and employee base Figure 5:Has managed cost efficiency


Strong RoA and RoE profile compared to peers

Shriram Transport has one of the highest RoAs in the industry. Given that it operates in arelatively riskier segment, it has high NIM and credit costs. However, credit costs in recent

years have also been affected by specific issues - such as ban on mining activitywhich has

affected Shriram Transport more than other players. However, the company has one of the

best opex-to-average asset ratios due to a) its partnership with private financers, b) multiple

responsibilities (such as origination, credit assessment, collection) being handled by a single

professional for customers and c) branch location in trucking hubs and off-city locations which

have low costs. These factors have resulted in it having high RoAs as compared to its peers.

27 3554

74

121

196233

292

368

421

527

0

100

200

300

400

500

600

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

( bn)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

(%)

Gross NPA (%) Net NPA (%) Credit costs

12,196 13,817 16,919 15,057 16,178

479484

488

502

539

440

450

460

470

480

490

500

510

520

530

540

550

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY09 FY10 FY11 FY12 FY13

(Nos)(Nos)

Employees Branches (RHS)

487 602 754 839 978

1.83% 1.81%

2.35%

2.17%

1.84%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

-

200

400

600

800

1,000

1,200


( mn)

AUM per branch Opex-to-average AUM (RH S)


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7

Dupont analysis

Figure 6: Total income-to-average assets Figure 7: Opex-to-average assets

*Net of interest costs


Figure 8: Provision & write-offs to average assets Figure 9: RoAs


Figure 10: Leverage Figure 11: RoEs


*All ratio are based on FY13 standalone financials

16.3%

16.2%

15.5%

17.7%

17.2%

20.2%

13.2%

21.4%

0.0% 10.0% 20.0% 30.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union

4.6%

3.6%

2.8%

3.4%

2.1%

5.5%

1.6%

4.3%

0.0% 2.0% 4.0% 6.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union

0.9%

0.8%

0.5%

1.3%

2.1%

1.2%

0.0%

2.7%

0.0% 1.0% 2.0% 3.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union

1.2%

1.9%

3.0%

3.9%

3.2%

3.8%

2.5%

3.1%

0.0% 2.0% 4.0% 6.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union

7.1

5.7

5.3

4.2

4.3

3.9

6.2

5.7

- 2.0 4.0 6.0 8.0

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union

9.6%

18.1%

21.2%

23.1%

20.1%

21.9%

19.8%

22.5%

0.0% 10.0% 20.0% 30.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union


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8

Rural penetration, newer products / businesses to driveShriram Transports growth

CRISIL Research expects the new CV sales to continue to decline in FY14. However, Shriram

Transports growth will be relatively less impacted due to:

Focus on pre-owned CV financing which is relatively stable compared to new CV

financing.

Increasing focus on the light commercial vehicle (LCV) and SCV segments, this is

expected to perform better than the medium and heavy commercial vehicle (M&HCV)

segment.

Increase in rural penetration through rural centers. Earlier it was mostly present in

trucking hubs and on the outskirts of large cities.

Newer products/businesses such as tractors, passenger vehicles, constructionequipment and automall to drive growth.

We expect these strategies to drive Shriram Transports AUM to grow at 16% CAGR over the

next two years to 706 bn in FY15. However, rural penetration and financing of small ticket

size loan in LCV/SCV may put pressure on the operating costs.

Rural penetration strategy: Shriram Transport has around 569 branch offices (as on June

30, 2013) across India. Most of them are present close to trucking hubs in semi-rural areas

and outskirts of urban areas. Over the past five-six years, the company has opened over 425

rural centers to increase its penetration in rural areas. A rural centre is a one-man branch

attached to a main branch office. These centers help the company gain new customers from

rural areas. The company has been converting these rural centers into main branches as they

increase in size. We expect the companys focus on rural areas to increase over the past few

years as vehicle penetration in these areas increases. There are more vehicles in rural areas

due to a) increase in rural income due to various government schemes and b) better road

connectivity.

Growth in new products: Shriram Transport has started financing tractors, small CVs,

passenger vehicles and construction equipment. CRISIL expects these products to grow at a

faster pace than Shriram Transports conventional truck financing business.

New LCVs and SCVs have grown at a significantly faster pace than new M&HCVs over

the past five years. These vehicles have now started seeing change of ownership. This

will lead to increased presence of LCVs and SCVs in the pre-owned vehicle market

providing financing opportunity for players such as Shriram Transport.

Tractor financing is expected to witness strong growth in FY14 as good monsoons are

expected to lead to better tractor sales.

The companys wholly owned subsidiary Shriram Construction Equipment Ltd started

financing construction equipment in FY11. The company primarily caters to first-time

borrowers/single machine owner in construction equipment for which the demand is

relatively resilient. We expect its AUM to grow at 19% CAGR over FY13-15 due to low

base and slower repayments despite weak economic outlook.

Given increased penetration of CVs in

rural markets, Shriram Transport has

increased focus on rural markets.

Despite overall slowdown in CV

industry, segments such as

tractors, LCVS, SCVs are

expected to perform better.


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9

Figure 12: New LCV sales grew faster than MHCVs Figure 13: Tractor financing to do well given good monsoon

Source: CRISIL Research Source: CRISIL Research

Figure 14: Construction equipment AUM to log good growth Figure 15: Construction equipment business dynamics

Typical customers First-time users, operator turned owners

Type of equipment

financed

Backhoe loaders, excavators, tippers

Average loan tenure 39 months

Average LTVs 80%

Average yields 17%

Number of branches 154

(operates out of Shriram Transport's

branches)

Market shares

(as per management)

8-9%


Even though CV industry is witnessing prolonged slowdown

CRISIL Research has recently lowered its GDP expectation to 4.8% for FY14. Lower GDP

and industrial growth is expected to impact freight availability demand and rise in diesel prices

will impact profitability of transporters. We expect the overall new CV sales to decline by 9-

11% in FY14 after posting a 2% decline in FY13. The M&HCV segment is expected to be hit

hard and is expected to decline by 10-15% in FY14 on the back of 26% decline in FY13.

Lower GDP is expected to lead to sluggish 3-6% growth in road freight demand (measured in

BTKM).

215,958

524,622

274,203 268,533

-

100,000

200,000

300,000

400,000

500,000

600,000

FY08 FY13

LCV M&HCV

-2%

17%

8%

-5%

0%

5%

10%

15%

20%

FY13 FY14E FY13-16

6,342 19,234 30,412

37,198 42,338

203%

58%

22%14%

0%

50%

100%

150%

200%

250%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

FY11 FY12 FY13 FY14E FY15E

( mn)

AUM y-o-y (RHS)


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10

Figure 16: New CVs to witness second consecutive year of decline

Source: CRISIL Research

Automall: Shift from supporting the financing business tobecoming standalone entity

Through wholly owned subsidiary Shriram Automall India Ltd (Shriram Automall), Shriram

Transport operates 24 auto malls across India. The auto malls provide a buying and selling

platform for pre-owned CVs. The vehicles are sold through physical auction, online auction or

through one-stop kiosk present across Shriram Transports branches. The auto malls generate

income through various services such as transaction charges, parking charges and valuation

services. They provide the following benefits:

A transparent platform for buying and selling vehicles, thus helping in price discovery of

pre-owned vehicles. These inputs will boost Shriram Transports knowledge on current

valuations of pre-owned vehicles.

It helps in business generation. Nearly 30% of Shriram Transports disbursements (by

volume) are to borrowers who would have bought vehicles through the auto malls.

Shriram Automall is now expanding its business which is expected to drive Shriram

Transports growth. While it initially focused on selling vehicles repossessed by Shriram

Transport, it has now tied up with other banks and NBFCs for sale of their repossessed stock.

It is also entering into sales of other pre-owned vehicles including cars, MUVs, passenger

vehicles, etc.

Shift toward newer vehicles to impact NIM

CRISIL Research believes Shriram Transport has been caught in a growth vs. profitability

conundrum. While its AUM has grown over the past three-four years, increasing AUM share of

newer vehicles and rural push is leading to pressure on yields and spreads. Shriram Transport

has strong competitive advantages in its traditional segment (financing of five-12 year old

vehicles) and virtually has no competition from organised players. However, banks and

NBFCs are present in the two-five year old category, with whom Shriram Transport will have

16%

-8% to -10%-26%

-10% to -15%

-4%

-1% to 1%

-2%

-9% to -11%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

FY13 FY14ELCVs M&HCVs Buses Overall CVs

Tied-up with leading banks and

NBFCs for sale of their

repossessed stocks.


13/32


11

to compete. As a result, we expect NIM to continue to be under pressure. We expect NIM and

RoA to stabilise at 7.1% and 2.9%, respectively, in FY15.

Focus on captur ing emerging opp or tuni ty in newer vehic les

Over the past two years, Shriram has started focusing on two-five year old pre-owned vehicles

as compared to its earlier strategy of focusing on five-12 year old pre-owned vehicles. As per

the management, this shift in on account of emerging opportunity in this segment driven by:

Increase in diesel prices are making older vehicles with lower mileage less remunerative

leading to increase in demand for newer vehicles.

Weak environment and fall in prices of vehicles are leading to buyers preferring to buy an

older vehicle as compared to a brand new vehicle.

Increasing share of LCVs and SCVs in the overall pre-owned market, most which are

changing owners for the first time.

Two-f ive year old segm ent character ised by high LTVs, low yields and

high compet i t ion

The increased focus on two-five year old vehicles has led to faster growth in AUM as these

vehicles have higher values as well as higher LTVs. However, the competition in this segment

is higher due to the presence of other organised players. NBFC such as Cholamandalam

Finance, Magma Fincorp are already present in this segment though their presence is lower

than that of Shriram Transport. Few of the private sector banks also cater to this segment.

CRISIL Research believes that Shriram Transports edge due to its valuation ability is mo re

pronounced in this segment. Higher competition and better earning potential of these vehicles

leads to relatively lower risks and hence lower yields in this segment. Nevertheless since the

profile of the customer in this segment remains similar to that in five-to-12 year old segment it

is still has some risks.

Figure 17: Two-five year old segment less lucrative


60-70%

14-16%

50-60%

18-24%

0%

10%

20%

30%

40%

50%

60%

70%

LTVs Yield

2-5 years 5-12 years

Shift in focus towards newer vintage

vehicle (2-5 year) driven by shift in

market dynamics).


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12

Weak macro-economic environment to impact asset quality

Shriram Transports asset quality has been under pressure for the past two -three years given

the sharp downturn in economic activity which is affecting freight demand for its customers.

Further, certain specific factors such as mining ban in few southern states have also affected

the asset quality. Given the weak financial profile of its customers and their dependence on

the vehicle for earning livelihood, Shriram has to closely work with its customers allowing part-

repayment in challenging economic conditions. As a result, the 180+ dpd as well as gross

NPAs have risen sharply over past few years. However, the eventual write-offs have remained

manageable.

CRISIL Research expects the economic activity to remain subdued over FY14 leading to

lower freight availability and freight rates. Further, the increase in diesel prices may put

pressure on profitability of SRTOs and DTOs.

Figure 18: 180+ dpd delinquencies on rise

Figure 19: Gross NPA as a percentage of on book assets

and credit cost trends


RoA/RoE to be below historical levels but still attractive

CRISIL Research estimates Shriram Transports RoA/RoE at 2.9%/ 18% over FY14-15; lower

than its past five-year average of 3.6%/24.3% respectively. The shift towards lower yield,

newer assets, pressure on opex costs due to higher rural push and small ticket size, and

increase in credit costs due to weak economic environment will lead to moderation in

RoA/RoE. Nevertheless, we believe these will still be attractive.

2.01.9

2.1

2.83.0

1.3 1.3 1.2

1.4

2.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5


Pre-owned vehicles New vehicles

2.1%

2.8%

2.6%

2.9%

3.1%3.3% 3.3%

1.3%

1.6% 1.6%

1.9%1.8% 1.9% 1.9%

62%

75%

86% 86%

76% 76% 76%

0%

10%

20%30%

40%

50%

60%

70%

80%

90%

100%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Gross NPA Credit costs Provision Coverage (RHS)


15/32


13

Figure 20: NIM on AUM Figure 21: RoA and RoE


Diversifying funding mix

The company has been diversifying its funding profile though securitisation remains a

dominant component accounting for 35% of the companys liabilities. The new securitisation

guidelines have also impacted the securitisation done by company and we expect the share of

securitisation in overall liability mix to decrease (from 35% in FY13 to 29% in FY15) which

may lead to upward pressure on borrowing costs. While the company has been tapping retail

investors through fixed deposits and public issues of NCDs, the share of retail liabilities

remains low at around 11%. The company enjoys credit rating of CRISIL AA/Stable and CARE

AA+/Stable which helps it in raising funds at competitive rates.

Figure 22: Borrowing mixby source of financing Figure 23: Borrowing mixby type of instrument


7.7%

8.4%

8.0%

7.4%

7.0%7.1%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%

FY10 FY11 FY12 FY13 FY14E FY15E

3.4% 4.0% 3.7% 3.2% 2.9% 2.9%

28.0%26.6%

22.5%

19.9%18.2% 18.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


RoA RoE

12% 11% 12% 12% 11%

21%

37%44% 43%

35%

67%

52%44% 45%

54%

0%

10%20%

30%

40%

50%

60%

70%

80%

90%

100%


Retail Securitisation Other Institutional

6% 7% 9% 8% 7%19% 16% 13%

20%28%

36% 34%28% 18%

22%

0.02%0.38%

3% 3%

3%

19%

5%3%

8%

5%

21%

37%44% 43%

35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Subordinated debts NCDs Term Loans

Fixed deposits Others Securitisation


16/32


14

Figure 24:Cost of funds on a decline Figure 25: Comparison of borrowing costs


11.6% 11.6%

11.8%

11.4%

10.5%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%


11.5%

14.1%

10.2%

9.9%

10.6%

10.3%

9.5%

12.6%

0.0% 5.0% 10.0% 15.0%

Magma Fincorp


Sundaram Finance

Mahindra Finance


Bajaj Finance


Shriram City Union


17/32


15

Key Risks

Concentrated in single sector

Shriram Transport is present in only CV finance. The CV industry is cyclical and competition in

the CV finance industry has intensified. Further, the current outlook on the CV financing

industry remains challenging even though pre-owned CV financing is relatively stable. The

company lends to risky borrowers who depend on their CV for generating income and may not

have other sources of income to meet the repayment obligation. While the company has

managed its risks well, it has in the past been affected by sector-specific issues such as ban

on mining activity in southern states.

Regulatory changes may impact profitability

The Reserve Bank of India (RBI) has been focusing on tightening prudential norms for NBFCs

to bring them at par with the banking industry. As a result, the playing field between banks and

NBFCs is getting leveled leading to increased competition as well as lower profitability for

NBFCs.

New norms impacted secur i t isat ion in FY13

The RBI recently released new securitisation guidelines which seek to discourage assignment

transactions in favour of PTC (pass through certificate). The same has resulted in the PTC

route being preferred for securitisation. However, under the PTC route the exposure to

securitised assets is included in risk-weighted assets, thus reducing the capital adequacy

ratios. Further, the cap on difference between base rate and yield on securitised assets

(currently at 8%) has resulted in inability to securitise high yield assets. These regulations

have impacted the quantum of assets securitised (as % of AUM) as well as capital adequacy

ratios.

Not i f icat ion of 90+ dpd NPA c lassi f icat ion norm s m ay impact prof i tab i l i ty

The Usha Thorat Committee has recommended that NBFCs will have to move to 90+ dpd

NPA classification norms from current 180+ days. Given Shriram Transports business model,

CRISIL Research believes that it will be difficult for it to contain its 90+ dpd delinquencies. Any

effort towards the same could result in loss of customers to banks. In case these norms get

notified, the higher provisioning requirement may impact profitability.

Migration to 90+ dpd NPA

classification norm a key

monitorable.


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16

Financial Outlook

AUM to grow at 16% CAGR over FY13-15

CRISIL Research expects Shriram Transports AUM to record 16% CAGR over FY13-15

notwithstanding the macro-economic concerns. Increase in rural penetration combined with

growth in newer vehicle segments such as tractors, SCVs and construction equipment will

continue to drive the growth. We expect the new CV portfolio to post 6% CAGR over FY13-15

owing to challenges in new vehicle sales. However, the pre-owned vehicle portfolio is

expected to witness a strong 18% CAGR and will continue to dominate its AUM. We expect

the share of two-five year old vehicles in the pre-owned portfolio to grow faster than the five-

12 year old vehicles.

Figure 26: AUM on strong growth track Figure 27: Pre-owned vehicles to continue to dominate


NIM to moderate; opex to remain stable

CRISIL Research believes that because Shriram Transport is moving from its traditional

markets (five-12 year old pre-owned vehicles) to new segments such as newer (two-five year

old) pre-owned vehicles, construction equipment, SCVs and tractors - which have higher

competitive intensity - NIMs have been under pressure and are expected to remain so in

FY14. Further, the increase in borrowing costs due to recent monetary tightening will also

impact NIM. We expect NIM to reach 7.0% in FY14 and 7.1% in FY15. Fee income is

expected to grow at 20% CAGR over FY13-15 primarily driven by growth in the Automall

subsidiary. Operating income is expected to grow at 15% CAGR to 49.8 bn in FY15.

We expect the rural push combined with lower ticket sizes on LCVs/SCVs to put pressure on

the operating costs. However, the same is expected to be offset by higher ticket sizes on

newer vehicles and improvement in operating efficiencies. As a result, we expect opex cost to

remain stable at 1.8-1.9% over FY13-15.

CRISIL Research expects pre-provision profit to grow at 14% CAGR over FY13-15 to 37.9

bn in FY15.

368 421 527 604 706

26.3%

14.5%

25.1%

14.5%

16.9%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

-

100

200

300

400

500

600

700

800


( bn)

AUM Growth (RHS)

74% 74% 76% 76%78%

24%22% 18% 16% 15%

2% 5% 6% 6% 6%

1% 1% 1%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Pre-owned New Construction equipment Others

AUMs to grow at 16% CAGR over

FY13-FY15 on the back of

increase in rural penetration,

combined with growth in newer

vehicle segments such as

tractors, SCVs and construction

equipment.


19/32


17

Figure 28:NIMs to moderate

Figure 29:Operating income to grow at 15% CAGR over

FY13-15


Figure 30: Operating income break-down Figure 31: Opex costs to remain stable


NPAs to increase owing to weak environment

Given the weak economic outlook, we expect the transport sector to remain under pressure

raising NPAs from 3.1% in FY13 to ~3.3% in FY15. However, given Shriram Transports

strong relationships with its customers, we expect the eventual write-offs to be manageable.

The overall credit costs are expected to increase from 1.8% in FY13 to 1.9% in FY15.

8.4%

8.0%

7.4%

7.0%7.1%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%


30,784 35,108 37,854 42,523 49,870

39.8%

14.0%

7.8%

12.3%

17.3%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

10,000

20,000

30,000

40,000

50,000

60,000


( mn)

Total Operating income Growth (RHS)

46%37%

48%60%

69%

51%60%

49%37%

28%

3% 3% 2% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Net interest income Securitisation income Fee and other income

2.4%2.2%

1.9% 1.8% 1.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%



20/32


18

Figure 32: Gross NPA to rise; credit cost to remain manageable


Capital adequacy to remain comfortable

We expect the standalone capital adequacy to remain comfortable at 20.6% in FY14-15, well

above the regulatory requirement of 15%. Given the strong profitability of the company

combined and institutional support, we believe the company will be able to meet its capital

requirement in case of faster growth.

Figure 33: Standalone capital adequacy to remain comfortable


2.1%

2.8%

2.6%

2.9%

3.1%

3.3% 3.3%

1.3%

1.6% 1.6%

1.9%1.8% 1.9% 1.9%

62%

75%

86% 86%

76% 76% 76%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%



16.7% 17.3% 16.7% 16.8% 16.9%

8.2%5.0%

4.1% 3.8% 3.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


Tier I Tier II

24.9%

22.3%20.8% 20.6% 20.6%


21/32


19

Management Overview

CRISIL's fundamental grading methodology includes a broad assessment of management

quality, apart from other key factors such as industry and business prospects, and financial

performance.

Highly experienced professional management

The top management boasts strong domain knowledge and vast experience. They have been

associated with the company for a long time and have an established track record growing the

business. The top management is supported by a highly qualified and experienced second

line. The board of directors comprises highly experienced professional from varied disciplines.

Since the company functions under the umbrella of Shriram group, it enjoys strong support

from the group in terms of organisational culture and availability of management resources.

Mr Umesh Revankar, with the company for around 24 years, took over as managing director

from Mr R Sridhar in July 2012. He was previously in charge of operations.

Strong second line management and a culture of empowerment

The company has a strong second line of management with professionals for various key

roles such as CFO, COO etc. Most of the personnel have been with the company for more

than decade and have strong expertise in their respective areas.

Further, the decision making is decentralised at various business levels, which enables quick

disbursements. This not only results in better relationship with the customers but also strong

cultural empowerment within the company. The product executive handles the relationship

with customers and takes care of assessment, disbursement and collection for the customer.

Most of the key management

team has been with the company

for over a decade.


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20

Corporate Governance

CRISILs fundamental grading methodology includes a broad assessment of corporate

governance and management quality, apart from other key factors such as industry and

business prospects, and financial performance. In this context, CRISIL Research analyses the

shareholding structure, board composition, typical board processes, disclosure standards and

related-party transactions. Any qualifications by regulators or auditors also serve as useful

inputs while assessing a companys corporate governance. Overall, corporate governance at

Shriram Transport meets the statutory requirement supported by reasonably good board

practices and involvement of an independent board

Board composition

Shriram Citys board consists of 10 members, of who five are independent directors, which is

in line with the requirements under Clause 49 of SEBIs listing guidelines. The board has

diverse experience in areas of finance, law and audit. We believe they have a fairly good

understanding of the companys business and its processes, and their participation in board

meetings is good. Shriram Transports chairman, Mr A run Duggal, an experienced

international banker, is also chairman of Shriram City Union Finance and Shriram EPC Ltd. He

has been associated with the Shriram group since November 2003.

Boards processes

The boards processes are well organised with all the necessary committees - audit,

remuneration, investor grievance, financial results review, asset liability and management - in

place to ensure good corporate governance practices. The audit committee is chaired by an

independent director, Mr M.S.Verma who retired as Chairman of State Bank of India in 1998.

The audit committee consist of two other independent and one nominee director. Other

independent directors include Mr. Sumatiprasad Bafna, Mr. Puneet Bhatia, Mr. S.

Lakshminarayanan, Mr. Amitabh Chaudhry and Mrs. Kishori Udeshi. The companys

independent directors have diverse background viz., finance, automobile, policy etc and are

leading professionals in their respective fields.

Related party transactions

The company paid 964 mn towards royalty, data sourcing and service charges to its related

parties (promoter and promoter group companies), which is 22% of its operating costs

(excluding employee costs). The management has indicated that the company receives

services from its promoter group/companies towards branding, legal and regulatory needs.

The related party expenses are towards meeting these costs. These are done at arm-length.

Corporate governance practises

meets statutory requirement


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21

Valuation Grade: 4/5

We have valued Shriram Transport by the P/B method. We have assigned a P/B multiple of

1.7x FY15E adjusted book value per share of 427 to arrive at a fair value of 726. At the

current market price of 632, our valuation grade is 4/5 indicating market price has upside

from the current levels.

Shriram has traded at median multiples of 1.7x over past 10 years and 1.9x over past five

years. Our assigned multiple is at a discount to the five-year median multiple enjoyed by the

company as we believe the RoA and RoE profile of the company will be lower as compared to

that witnessed over the past five years. The shift towards newer assets will impact its NIM and

the weak economic environment will impact the credit costs leading to lower RoA/RoE over

the next two years.

Our assigned multiple of 1.7x is at a premium to the median forward multiple enjoyed by the

asset financing peers as well as median multiple of private sector banks. The leading position

of Shriram Transport among asset financing NBFCs justifies the premium over other NBFCs

whereas the superior RoA/RoE profile (over median) justifies the premium over private sector

banks.

One-year forward P/B band One-year forward P/B movement

Source: NSE, CRISIL Research Source: NSE, CRISIL Research

0

200

400

600

800

1,000

1,200

1,400

Apr-01

Dec-01

Aug-02

May-03

Jan-04

Oct-04

Jun-05

Mar-06

Nov-06

Aug-07

Apr-08

Dec-08

Sep-09

May-10

Feb-11

Oct-11

Jul-12

Mar-13

Dec-13

()

Shriram Transport 1x 1.5x 2x 3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Apr-01

Dec-01

Aug-02

May-03

Jan-04

Oct-04

Jun-05

Mar-06

Nov-06

Aug-07

Apr-08

Dec-08

Sep-09

May-10

Feb-11

Oct-11

Jul-12

Mar-13

Dec-13

(Times)

1yr Fwd PB (x) Median PB

+1 std dev

-1 std dev

Fair value of 726


24/32


22

Peer comparison

Name of company CMP

M.Cap

bn

P/B (x) RoE (%) RoA (%)

FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E

Rural Electrification Corporation 211 208 1.2 1.0 0.8 23.8 24.5 23.0 3.2 3.3 3.1

Power Finance Corporation 154 203 1.0 0.7 0.6 19.7 20.0 19.7 2.9 2.9 2.8

IDFC 106 161 1.6 1.1 1.0 14.1 13.7 13.7 2.8 2.7 2.7

Infrastructure finance NBFCs 1.0 0.9 0.8 19.7 18.3 17.3 2.9 2.7 2.7

M&M Financial services 312 177 2.4 3.2 2.8 24.4 21.3 21.9 4.0 3.7 3.6

Shriram Transport 632 143 2.0 1.7 1.5 19.9 18.2 18.3 3.2 2.9 2.9

Bajaj Finance 1,495 74 1.7 1.9 1.6 21.9 19.7 20.1 3.8 3.7 3.7

Sundaram Finance 601 67 2.0 2.1 1.8 23.6 23.0 22.7 2.8 3.0 3.1

Shriram City Union 1,065 63 2.6 2.2 1.8 22.4 19.7 20.2 3.1 3.0 3.0

Cholamandalam Investment 246 35 2.0 1.6 1.3 18.1 17.5 18.9 1.9 1.8 2.0

Magma Fincorp 65 12 1.1 0.8 0.7 10.1 12.2 14.7 1.3 1.3 1.5

Asset financing NBFCs 2.0 1.6 1.4 22.1 19.8 20.5 3.0 3.0 3.1

HDFC 798 1,245 4.0 4.4 3.8 23.6 21.4 22.6 2.9 2.3 2.3

LIC Housing Finance 204 103 1.7 1.4 1.2 17.1 18.9 19.1 1.4 1.5 1.6

Housing finance NBFCs 2.6 2.8 2.4 20.4 20.3 21.1 2.1 2.0 2.0

State Bank of India 1,763 1,206 1.1 0.9 0.8 15.5 11.9 12.8 0.9 0.7 0.8

Bank of Baroda 650 274 0.9 0.8 0.7 15.1 13.5 14.0 0.9 0.8 0.8

Punjab National Bank 590 208 0.8 0.6 0.6 15.7 12.5 13.9 1.0 0.8 0.9

Canara Bank 259 115 0.7 0.5 0.4 12.1 10.5 11.6 0.7 0.6 0.6

Union Bank 121 72 0.8 0.4 0.4 13.6 11.5 12.8 0.8 0.6 0.6

PSU Banks 0.6 0.6 0.6 14.5 13.0 13.7 0.8 0.8 0.9

HDFC Bank 666 1,595 4.1 3.7 3.1 20.3 21.2 22.2 1.8 1.9 2.0

ICICI Bank 1,096 1,265 1.8 1.7 1.6 13.2 13.7 14.3 1.6 1.6 1.7

Axis Bank 1,283 602 1.8 1.6 1.4 18.5 16.7 16.8 1.7 1.6 1.6

Kotak Mahindra Bank 750 577 3.2 3.1 2.7 15.5 14.9 15.0 2.1 2.1 2.2

IndusInd Bank 429 225 2.8 2.6 2.3 17.2 16.4 17.7 1.6 1.7 1.7

Yes Bank 376 135 2.6 1.9 1.5 24.8 23.2 22.7 1.5 1.4 1.5

Private Sector Banks 1.9 1.5 1.4 17.1 15.7 16.5 1.8 1.7 2.2

Source: Industry, CRISIL Research


25/32


23

Company Overview

Incorporated in 1979, Shriram Transport is the flagship company of the Shriram group. It is

Indias largest asset financing NBFC with AUM of 537 bn (as on March 2013). Its forte is

financing of pre-owned vehicles (76% of the AUM), though it also finances new commercial

vehicles. The company has created a niche for itself in financing two-12 year old vehicles for

small truck owners or driver-turned-owners. The company was pre-dominantly focused in

southern India where nearly 46% of its 539 branches (as on March 31, 2013) are located.

However, the company is focussing on expanding its network in non-South regions, especially

in central and eastern India. Leveraging its core strength, the company has entered (through

wholly owned subsidiaries) financing of construction equipment and has started auto malls,

which provide a platform for buying and selling of used vehicles.

Shriram Transportcorporate structure


Shriram Transport Finance Company Ltd.

- Financing o f pre-owned and new CVs

- AUM of 496.7 bn as on March 31, 2013

- FY13: Revenues: 65.6 bn PAT 13.6 bn

Shriram Equipment Finance Company Ltd.

- Financing of construction equipment- AUM of 30.4 bn as on March 31, 2013

- FY13: Revenues: 4.04 bn PAT 2.1bn

Shriram Automall India Ltd

- Provides platform fo r buying and selling of used vehicles- Currently operates 21 automalls across India

- FY13: Revenues: 750 mn PAT 140 mn

Leading financer of pre-owned

commercial vehicle.


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24

Region-wise branch break-up

539 branches as on March 31, 2013


Shriram Transports product overview


North

16%

South46%

East10%

West17%

Central11%

Shriram Transportproduct overview

Others Asset financing

Automall Used CVs

Co branded creditcards

New CVs

Freight billdiscounting

Constructionequipment

Tractors


27/32


25

Backed by large institutional shareholders

Key shareholders % stake

Shriram Capital Ltd 25.9

Piramal Enterprises Ltd 10.0

Genesis Indian Investment Company Ltd 6.1

Ontario Teachers 5.0

Sanlam Life Insurance Ltd 5.0

Centaura Investments 3.3

Stichting Pensioefonds Abp 1.5

Smallcap World Fund 1.2

Vanguard Emerging Markets 1.1

Equinox Partners 1.1

Schroder International 1.0

Total 61.2

As on Sep 30, 2013Source: Company

Key Milestones

1979 Incorporated

1984 Initial public offering

1990 Investment from Telco & Ashok Leyland

1999 Tied-up with Citicorp for CV financing under portfolio management services

Entered first securitisation transaction

2002 Preferential allotment to Citicorp Finance (India)

2004 Preferential allotment to Axis Bank and Reliance Capital

2005 Investment from Chrys Capital

2006 Merger of Shriram Investment Ltd and Shriram Overseas Finance Ltd

Investment by TPG

2009 Purchase CV and CE loans of GE Capital Services India and GE Capital Financial Services

2010 Raised 5.84 bn through QIP to domestic and international investors

Launched its first Automall

Source: Company


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26

Annexure: Financials (Consolidated)


Income Statement Ratios

( mn) FY11 FY12 FY13 FY14E FY15E ( mn) FY11 FY12 FY13 FY14E FY15E

Net Interest Income 29,876 34,028 36,913 41,400 48,531 Spread Analysis

Non Interest Income 908 1,080 941 1,122 1,340 NIM on AUM 8.4% 8.0% 7.4% 7.0% 7.1%

Total Ope rating Incom e 30,784 35,108 37,854 42,523 49,870 Cost of borrow ings 11.8% 11.4% 10.5% 10.8% 10.8%

Operating Expenses 7,768 8,569 8,714 10,016 11,913 Return Ratios

Staff Costs 3,711 4,076 4,388 5,166 6,361 ROA (%) 4.0% 3.7% 3.2% 2.9% 2.9%

Other Operating Ex pens es 4,057 4,493 4,327 4,851 5,553 ROE (%) 26.6% 22.5% 19.9% 18.2% 18.3%

Pre- provision profit (PPP) 23,016 26,538 29,140 32,506 37,957 Growth ratios

Provision & Contingency 5,187 7,696 8,665 10,581 12,192 AUM 26.3% 14.5% 25.1% 14.5% 16.9%

Profit before depre ciation 17,829 18,842 20,475 21,925 25,765 Disbursements 39.9% 2.9% 38.2% 1.9% 21.6%

Deprec iation On Fixed Assets 113 174 227 260 267 Net Interest Income -5.0% -6.6% 38.9% 40.6% 34.8%

Extra-ordinary gain / (loss) 659 907 1,379 587 525 Securitisation income 133.1% 32.1% -10.6% -15.5% -11.1%

PBT 18,375 19,575 21,627 22,252 26,023 Other income -8.7% 71.6% 89.4% 20.0% 20.0%

Provision for tax 6,204 6,488 6,988 7,190 8,408 Total Operating Income 39.8% 14.0% 7.8% 12.3% 17.3%

PAT 12,171 13,088 14,639 15,062 17,615 Operating Expenses 61.0% 10.9% 2.3% 14.9% 18.5%

Share in assoc. Profits (0) 1 (5) (5) (5) Pre- provision profit (PPP) 33.7% 15.1% 9.7% 11.5% 16.9%

Report PAT after MI 12,171 13,088 14,634 15,058 17,610 Provision & Contingency 27.5% 48.4% 12.6% 22.1% 15.2%

Extra-ordinary gain / (loss) 659 907 1,379 587 525 Adjusted Net Profit 34.8% 5.8% 8.8% 9.2% 18.1%

Adjusted PAT after MI 11,512 12,181 13,256 14,471 17,085 EPS () 34.4% 5.7% 8.5% 9.2% 18.1%

Book Value () 29.5% 23.1% 19.1% 17.6% 17.2%

Balance sheet Asset Quality

( mn) FY11 FY12 FY13 FY14E FY15E Gross NPA (%) 2.6% 2.9% 3.1% 3.3% 3.3%

Total Share Capital 2,262 2,263 2,269 2,269 2,269 Net NPA (%) 0.4% 0.4% 0.8% 0.8% 0.8%

Equity share capital 2,262 2,263 2,269 2,269 2,269 Provision & w riteoffs (as % of AUM) 1.6% 1.9% 1.8% 1.9% 1.9%

Equity Share w arrants - - - - - Valuation Data

Reserves 46,288 57,632 70,726 83,711 98,661 P/E (x) 12.4 11.7 10.8 9.9 8.4

Shareholders Funds 48,550 59,896 72,995 85,980 100,930 P/ABV (x) 3.0 2.4 2.0 1.7 1.5

Minority Interest - - - - - Key Parameters

Preference capital - - - - - Loan assets - including off-book ( mn 368,168 421,373 527,172 603,857 705,875

Borrow ings 206,480 244,278 341,409 394,376 474,316 Disbursements ( mn) 205,401 211,265 291,890 297,421 361,635

Other Liabilit ies & Provisions 55,557 51,907 46,180 50,857 57,650 Capitalisation ratios (Adjuste d)

Deferred tax liability - - - - - Capital adequacy ratio 24.9% 22.3% 20.8% 20.6% 20.6%

Sources of funds 310,586 356,080 460,583 531,214 632,897 Tier I capital ratio 16.7% 17.3% 16.7% 16.8% 16.9%

Tier II capital ratio 8.2% 5.0% 4.1% 3.8% 3.7%

Cash & Bank Balances 37,642 53,949 64,939 66,410 79,844 Efficiency ratio

Investments 34,774 37,590 38,037 38,697 35,970 Cost to Income ratio 25.6% 24.9% 23.6% 24.2% 24.4%

Net Loans and adv anc es 194,700 224,997 329,146 396,923 486,867 Opex/ AUM 2.4% 2.2% 1.9% 1.8% 1.9%

Net Fixed Ass ets and Capital 421 501 692 623 582 Leverage (x) 4.3 4.1 4.7 4.6 4.7

Deferred tax asset 1,542 2,183 2,871 2,871 2,871 Leverage (x) - including off -book 7.6 7.1 7.2 6.8 6.6

Other Assets 41,509 36,860 24,898 25,689 26,762

Application of funds 310,587 356,080 460,583 531,214 632,897

Quarterly Financials - standalone

Per share ( mn) Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

FY11 FY12 FY13 FY14E FY15E Total operating income 8,025 8,683 8,959 8,951 9,030

Adj EPS () 50.9 53.8 58.4 63.8 75.3 Change (q-o-q) 8% 3% 0% 1%

Adj Book Value () 211.4 260.3 310.0 364.6 427.2 Adj. PAT 3,219 3,376 3,460 3,552 3,411

Dividend per share () 6.5 6.5 7.0 8.0 10.0 Change (q-o-q) 5% 2% 3% -4%

Actual o/s shares - mn 226.2 226.3 226.9 226.9 226.9 EPS 14.2 14.9 15.3 15.7 15.0


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27

Focus Charts

Focussed on pre-owned CV financing AUM growth to remain strong


NIM to moderate Credit costs to rise owing to weak environment


RoA/RoE to moderate Performance of Shriram Transport vs CNX500

-Indexed to 100


75% 76% 74% 74% 76%76% 78%

25% 24% 24%22% 18% 16% 15%

2%5% 6% 6% 6%

1% 1% 1%

50%

55%

60%

65%

70%

75%

80%

85%

90%

95%

100%


Pre-owned CVs New CVs Construction equipment Others

368 421 527 604 706

26.3%

14.5%

25.1%

14.5%

16.9%

0%

5%

10%

15%

20%

25%

30%

-

100

200

300

400

500

600

700

800


( bn)

AUM Growth (RHS)

7.7%

8.4%

8.0%

7.4%

7.0%

7.1%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

9.0%


2.1%

2.8%

2.6%

2.9%

3.1%

3.3% 3.3%

1.3%

1.6% 1.6%

1.9%1.8% 1.9% 1.9%

62%

75%

86% 86%

76% 76% 76%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%



3.4% 4.0% 3.7% 3.2% 2.9% 2.9%

28.0%26.6%

22.5%

19.9%

18.2% 18.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%


RoA RoE

-

20

40

60

80

100

120

140

160

Oct-11

Nov-11

Dec-11

Feb-12

Mar-12

Apr-12

Jun-12

Jul-12

Sep-12

Oct-12

Nov-12

Jan-13

Feb-13

Apr-13

May-13

Jun-13

Aug-13

Sep-13

Oct-13

Dec-13

Shriram Transport CNX 500


30/32


CRISIL Research Team

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