Improving macroeconomic scenario has resulted in better road freight rates for the truck operators and thus led to traction in commercial vehicles sales.
The road freight index tracked by TCI has also indicated improvement in road freight rates across various region of the country.
In the backdrop of improved macroeconomic factors, we remain positive on Shriram Transport Finance Company (STFC) loan growth outlook, and expect a loan book growth of 20% y-o-y for FY10 to Rs215 billion and AUM of Rs279 billion.
Further, demand for CV likely to move northwards as the new emission norms will become effective from April 2010. Modernization of the fleet will boost replacement for a relatively younger 5-12 year old trucks, where STFC hold significant market share.
STFC is raising Rs10 billion through a public issue of non-convertible debentures. The fund raising would be highly positive for STFC as it would help containing cost of funds and maintain firm NIM.
The full impact of the improved cost of funds will be more visible in the H2FY10. Secondly the high cost one year deposit will also go off books and will further enhance NIM.
Since our initiating coverage report dated 12th June’09 at Rs 290, given the improvement in the CV sales growth and improving road freight rate the stock has witnessed a run up of 18%.
We maintain out positive outlook for the stock and revising our valuation multiple and price target to Rs 375 (Rs350 earlier). However, due to the recent run up in the stock and ~10% upside from the current levels we recommend ACCUMULATING the stock on declines.
At our target price of Rs375, the stock will be quoting at P/ABVx of 2.78x its FY10 adjusted book value of Rs135.
At the current market price the stock is trading at P/Ex of 9.4x and P/ABVx of 2.54x its FY10 earnings estimates. We recommend ACCUMULATING the stock with a revised price target of Rs 375 (Rs350 earlier).