Shriram Transport Finance Company (STFC) is one of India’s largest asset financing NBFCs. STFC has almost three decades of experience during which it has created a niche presence in pre-owned commercial vehicle (CV) financing.
Typically large fleet operators who buy new CV use it for 0-4 years and claim depreciation during this period. Such pre-owned CVs are sold to small and individual truck owners. STFC finances 5-12 year old CV at an attractive yield of 18-20%.
India’s Improving road infrastructure augurs well for the commercial vehicle industry. This will improve mobility of goods and will foster country’s industrial growth. Better infrastructure will improve demand for commercial vehicles and will be positive for CV financiers as well.
Due to the unfavorable macroeconomic scenario, which prevailed during FY09, the demand for CV was impacted as the freight rates were under pressure. Demand for CV usually moves in sync with industrial growth.
The freight rates are stabilizing now and improvement in the overall business sentiment will be positive for STFC.
We opine that STFC is well positioned to tap future business opportunities, and is expected to be an early beneficiary of the revival in economy.
We expect a 20% y-o-y growth in STFC’s advances and a 20% yoy growth in net profit during FY10.
With improvement in industrial growth outlook, stabilization in freight rates, we have a positive bias for STFC’s future growth outlook. We also expect some improvement in its asset quality.
Historically the stock has traded at a premium to its book value and improvement in the macro economic scenario will lead to re-rating of the stock.
The stock is currently trading at 2.2x its FY10 P/ABV. We are initiating coverage on the stock with a BUY recommendation and a price target of Rs350.