Rising industrial growth is good news for the commercial vehicle (CV) industry as it provides a strong foundation for sales to increase. The fortunes of truck financing firms are intertwined with that of CV makers, except that they also run the risk of piling up non-performing loans in a downturn. Firms such as Shriram Transport Finance Co. Ltd will naturally benefit from growth in loans and the improvement in industrial growth. Not surprisingly, the firm reported a 58% increase in net profit to Rs237 crore in the December quarter, against the same period last year. On a sequential basis, profit grew by 14%.
Shriram’s assets under management rose by 9% last quarter to Rs28,179 crore, compared with the September quarter. It had also taken over Rs1,100 worth of loans from GE Capital, to boost its business and margins. At present, the firm is earning a spread— the difference between its cost of funds and the interest earned on its loans—of about 7-8% on its loan portfolio.
Current market conditions are such that it is able to borrow at relatively low interest rates. Besides, the increase in the scale of lending has led to a drop in operating expenditure as a proportion of revenue. All this is leading to higher profit margins.
The loan book acquired from GE will also give a boost to interest income in the coming quarters. The return on assets of the acquired portfolio is higher than the firm’s average. Challenges to the company will be from an increase in interest rates or from higher competition, both of which can narrow spreads. As of now, neither seems a threat and rising CV sales and higher demand in the used-vehicle market will drive performance. The share is up by 17% from a month ago, but closed just 1.4% up on Monday after the results were announced. At current levels, the stock trades at around 15 times estimated earnings for the current fiscal year.
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