When the entire auto sector is down in the dumps and when almost every analyst is shouting from the rooftops that commercial vehicle volume growth will be tepid this fiscal, why should a truck financing company see its stock rising 24% in the past month?
One argument could be that Shriram Transport Finance Company Ltd(STFC) lends mainly for acquiring second-hand trucks and this segment may not be as badly hit by rising interest rates. Another could be that the company has enormous growth potential because it operates in a space that is relatively under-penetrated and is served by the unorganized sector.
But the company’s March quarter results show that growth in disbursements has slowed down sharply in the fourth quarter to almost a third of the 62% annual rate for FY2007. Provisions on account of bad loans too have increased, as STFC moves towards making provisions for 2% of its assets, in line with its average bad loan percentage in 27 years of doing business. Gross non-performing loans have increased to 1.9% from 1.2% a year ago. Interest expenses as a percentage of income from operations went up to 57% in the March quarter, compared with 49% in the year-ago period.
So why has the STFC stock moved up?
The market seems enthused by the innovative initiatives taken by the STFC management. One of these is utilizing the private moneylender network to grow its loans. About Rs100 crore a month is being disbursed through these agents and there’s an enormous potential for scaling up. The company is also getting into the freight bill discounting business where yields, net of bad loans, are higher than in its commercial vehicle lending business. The company also uses securitization of its loans to increase both its resources and its return on assets. The loans are sold to banks keen to increase their priority-sector lending portfolio. Tractor financing is another area. In short, STFC has developed a unique expertise in an area where other organized-sector players have feared to tread. These new initiatives help exploit this expertise and make it easier to justify its valuation of 2.3 times estimated FY08 price-to-book value.
NIIT Ltd’s March quarter results didn’t live up to market expectations, which were running at their peak on hopes that demand for software professionals would boost its performance. Consolidated revenues grew 123% to Rs257 crore, but that included Rs115 crore of sales done by Element K, a content solutions company NIIT acquired last July.
Organic revenues grew 24%, much better than the 16% growth recorded in the first three quarters. But the markets weren’t impressed. NIIT shares fell 8% on Wednesday to Rs912. A day earlier, they had peaked at Rs990, taking its one-year gain to about 200%.
The expectation was that margin improvement in all segments of the company would lead to a huge jump in profit. But NIIT reported an increase in margins only in its business with individuals. Its institutional and corporate business saw a drop in profitability last quarter. Profit from the institutional business nearly halved. The Element K business too saw a sharp drop in profit; it barely managed to break even last quarter, after reporting a profit margin of 4.5% earlier in the year.
Analysts are still confident that margins can improve, as Element K shifts some of its work offshore to save costs. In the domestic training business, too, fee hikes coupled with high volume growth should lead to higher margins. For now though, it makes sense to be cautious with the NIIT stock. It trades at 31 times trailing earnings, and even if earnings jump by 66% this fiscal (as some analysts expect), it would still be trading at 20 times forward earnings.
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