Commercial vehicles financier Shriram Transport Finance Co. Ltd’s move to acquire General Electric Co.’s Indian transport finance assets will increase its interest margins. It also creates a base of clients for the company for its entry into the construction equipment leasing business.
Shriram has acquired around Rs1,100 crore of GE’s hypothecation loan assets. This is around 4.2% of its portfolio of Rs26,000 crore, and the company states that the “valuation of the deal was attractive”.
At present, Shriram earns a net interest margin of around 8% on its portfolio. The acquisition could help expand this by 10-15 basis points, as the return on assets in the acquired portfolio is higher. One basis point is one-hundredth of a percentage point.
However, the acquisition brings a different profile of customers in the truck segment. The GE portfolio has medium and large truck operators, where Shriram does not intend growing. Instead, Shriram’s strength stems from being a quasi-monopoly in the used truck financing segment, thriving mainly on single or small truck operators, where it has a 25% market share.
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The company has chosen to have a lower exposure with 7% market share in the new truck financing segment. There is stiff competition in this space, with banks and non-banking financial companies vying for a share.
Shriram has been able to sustain its margins and maintain a healthy portfolio with non-performing loans of around 2% of its portfolio. This is on account of its niche business presence and personalized collection system built around 500 branches throughout the country, a business model hard to replicate.
An interesting part of the GE deal is the Rs300 crore of outstanding loans towards the construction equipment segment. This could be the kicker for Shriram’s intended foray into this space through its wholly owned subsidiary.
Shriram’s business strategy is centred on extending services in the low-ticket truck operators space. It is setting up malls, kiosks and auction centres for facilitating purchase and sale between truck owners, whereby it will earn a commission. Although this business is barely 1% of net revenue, it builds visibility and translates into business for its core activity.
Analysts’ consensus is that for the year to March, Shriram’s earnings will grow by around 25% from around Rs29 per share in fiscal 2009. The shares closed around 7% higher on Thursday at Rs467, which discounts the estimated earnings of around Rs36 about 13 times.
For the next two to three years, the company is poised to ride the upturn in economic activity and commercial vehicle sales.
Graphics by Ahmed Raza Khana / Mint
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