shriram transport finance ltd. - india...

Sector: Financials

Sector view: Positive

Sensex: 26221

52 Week h/l (Rs): 1286/761

Market cap (Rscr) : 21,025

6m Avg vol (‘000Nos): 833

Bloomberg code: SFTH IN

BSE code: 511218

NSE code: SRTRANSFIN

FV (Rs): 10

Price as on Oct 01, 2015

Company rating grid

Low High

1 2 3 4 5

Earnings Growth

RoA Progression

B/S Strength

Valuation appeal

Risk

Share price trend

75

100

125

150

Oct‐14 Jan‐15 May‐15 Sep‐15

STFC Sensex

Share holding pattern (%) Dec‐14 Mar‐15 Jun‐15

Promoter 26.1 26.1 26.1

Insti 55.3 55.4 55.0

Others 18.6 18.6 18.9

Rating: BUY Target (12‐month): Rs1,180

CMP: Rs927

Upside: 27.3%

Research Analyst: Rajiv Mehta

Franklin Moraes [email protected]

Shriram Transport Finance Ltd.

Company Report

October 05, 2015

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices, estimates and views on sectors and markets.

Patience will pay! AUM growth recovery to start from FY17 Our meeting with STFC revealed that AUM growth is unlikely to accelerate significantly in near term as rural and urban consumption still remain weak. Company’s core customers (owner‐drivers and SRTOs) have not witnessed any revival in vehicle utilization so far. However, the sharp decline in fuel prices has improved margins of truckers and prices of older used CVs which is a business positive. In longer run, we expect demand for older used vehicles to recover cyclically thus driving an AUM CAGR of 18‐20% over FY16‐18.

NIMs and credit cost to be drivers of profitability improvement Outlook for STFC’s NIM is quite encouraging underpinned by various factors a) securitized portfolio yield should move north as collection efficiency improves b) yield on on‐book portfolio will be resilient due to sustained AUM shift towards older used CVs c) cost of bank borrowings would decline in‐line with Base Rate d) benefits from lower Bonds/CP rates will continue bolstered by recent upgrade in credit rating to AAA. As per management, transition to 90dpd NPL recognition would not impact credit cost as the buffer of a high PCR would be utilized. On contrary, any cyclical easing in stress could drive some moderation. We estimate STFC to revert to 3%+ RoA and 18%+ RoE by FY18.

Worst likely over in equipment finance business STFC has decided to merge the equipment financing subsidiary with itself. Presently, the sole focus is on working out recoveries from the defaulted customers and the efforts are translating into encouraging collections. Management intends to resume AUM growth from end 2015 but with a revamped strategy. The CE industry has started to show positive signs as the prices of used equipments have improved. A pick‐up in infra/industrial construction activity will aid growth and NPL recovery.

Valuation at mid-cycle level - an opportunity to play the up-cycle! STFC is currently trading at historical mean valuation of 2.2x 1‐year rolling fwd P/ABV. On FY18 ABV, the stock valuation is at undemanding 1.8x considering the anticipated strong recovery in growth and profitability. At the start of an upcycle, if an inherently robust and profitable franchise is available at mid‐cycle valuation then it’s a sound case to own it.

Financial summary Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Total operating income 4,184 5,002 5,932 7,262

Yoy growth (%) 9.7 19.6 18.6 22.4

Operating profit (pre‐provisions) 3,105 3,751 4,468 5,535

Net profit 1,238 1,517 1,940 2,570

yoy growth (%) (2.1) 22.6 27.9 32.5

EPS (Rs) 54.6 66.9 85.5 113.3

Adj. BVPS (Rs) 390.4 414.7 449.0 501.5

P/E (x) 16.9 13.8 10.8 8.1

P/Adj.BV (x) 2.4 2.2 2.0 1.8

ROE (%) 14.1 15.4 17.2 19.6

ROA (%) 2.28 2.4 2.7 3.1 Source: Company, India Infoline Research


2

AUM mix has shifted towards Used CV HCV share has been on the rise

82.1

84.0

84.7

87.7

88.5

89.4

90.4

90.9

92.2

17.3

15.4

13.1

11.8

10.4

9.4

8.4

7.9

7.7

0.6 0.6 2.2 0.6 1.2 1.2 1.2 1.2 0.1

0%

20%

40%

60%

80%

100%

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

Used New Others

39.6

39.9

40.7

42.3

44.3

29.9

29.1

28.7

27.0

25.7

21.6

22.2

22.2

22.4

22.8

5.5 5.4 5.4 5.5 5.6 3.4 3.4 3.0 2.8 1.6

0%

20%

40%

60%

80%

100%

Q1 FY15 Q2 FY15 Q3 FY15 Q4 FY15 Q1 FY16

HCVs M&LCVs PVs Tractors Others

Source: Company, India Infoline Research

An old and well-established lending franchise! Shriram Transport (STFC) is the largest financier of commercial vehicles in India. The company is part of the Shriram Group which has presence in a wide array of financial services. STFC enjoys a dominant share of 26‐27% in the used CV financing market and 7‐8% market share in the new CV financing segment. The company mainly caters to niche segments of owner‐drivers and small road transport operators (SRTOs). These customers typically don’t have access to institutional finance. The company currently has 1.2mn live customers and about 1.7 mn live contracts representing a significant AUM of ~Rs. 60,500cr. With a pan‐India presence through 770 branches and 765 rural centres, STFC employs ~9,500 field officers and overall 16,000+ employees. The size of business franchise is unprecedented underpinned by a first mover advantage and sustained focused investments. Till 2007, STFC was purely a truck financier and has since diversified into synergistic products such as financing of Passenger Vehicles, Tractors, Multi Utility Vehicles, 3‐Wheelers and Construction Equipment. Presently, truck financing (used and new combined) is 70% of the AUM and the balance is other products. The company has a philosophy of financing only vehicles which would be utilized to generate income by the customer. For instance, the customer segment in case of tractors is fleet operators and not the farmers.

Gradual increase in AUM off‐late; reduction in securitization activity driving increase in on‐book assets

70.0

75.0

80.0

85.0

90.0

95.0

100.0

35,000

40,000

45,000

50,000

55,000

60,000

65,000

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)(Rs cr)

AUM (LHS) On‐Book (RHS)


Holds a dominant share of 26‐27% in used CV financing market and 7‐8% market share in new CV financing Truck financing (used and new combined) is 70% of the AUM and the balance is other products.


3

A solid credit risk management framework STFC has managed to mitigate risks in the business by developing a ‘closer‐to‐customer’ model, following prudent credit underwriting (understanding customers’ proposed business model, personal reference checks, keeping adequate loan cover, monitoring client and truck wise exposure limits, etc) and making the field officers responsible for recovery of loans they originate (linking incentives with collections/recovery, direct contact with the customers, repossession in case of sustained default, etc). Under a 100% subsidiary, Shriram Automall Ltd, company runs an unparalleled physical CV transaction platform in the country. Automall is a market place where sellers and buyers meet for transacting in used CVs. STFC has about 52 Automalls in operations who have so far witnessed more than 0.3mn transactions. Running Automalls provides multiple advantages to the company viz a) funding the participating buyers aids asset growth b) additional income in the form of advisory fees for sale, valuation, etc and c) easy liquidation of repossessed vehicles. Asset growth linked to rural and urban consumption trends Unlike the obvious perception that STFC’s business would be significantly linked to infra and industrial capex and mining activity, company’s business growth is intrinsically co‐related to urban and rural consumption. According to the management, about 85% of the trucks financed would be involved in transit of fruits, vegetables and other essential commodities (inter‐state and intra‐state). So only around 15% of the truck financed is used for other activities with mining forming a negligible portion. Most of the customers are owner‐drivers earning daily freight for transporting the consumables. The slowdown in urban consumption and the weakness in rural consumption has significantly moderated company’s asset growth from 24% as of FY13 to 11% currently. Competition nearly negligible in older used CV financing - a difficult business to crack Of the total AUM of ~Rs. 60,500cr, used CV financing comprises more than 90%. Within this, there are sub‐segments of younger (2‐5 year old) and older (5‐12 year old) used CVs. Less than 5‐year old vehicles are 21‐22% of the AUM (including new CVs financed) while more than 10‐year old vehicles financed are just 7% of the assets. The core operating segment for the company has always been 5‐10 year old CV financing which is ~70% of the portfolio. STFC faces negligible competition from banks and NBFCs in older used vehicle financing segment. The combined portfolio of other organized players is much lower than STFC’s AUM. The need to make substantial granular investments for running the business and challenges associated with valuation of older vehicles, customer credit appraisal, collection and recovery/liquidation has kept the competition at bay. Thus, in used CV financing market the company commands a dominating share of 26‐27%. It has also been observed that not many players have tried to penetrate this market in the previous up‐cycles. Most of the banks and NBFCs are more focused on large fleet operators segment where the growth and profitability dynamics are quite different.

STFC has managed to mitigate risks in the business by developing a ‘closer‐to‐customer’ model ng Field officers responsible for recovery of the loans they originate ~85% of trucks financed would be involved in transit of fruits, vegetables and other essential commodities Used CV financing more than 90% of AUM; emphasis on 5‐10 year old vehicles Negligible competition from banks and NBFCs in the owner‐driver older used vehicle financing segment.


4

Older used CV financing a more profitable business also Given the challenges associated with financing older CVs and the consequent low competition in this business, large incumbents like STFC are able to charge handsome lending rates in the range of 18‐24%. As the customer segment also does not have easy access to formal lending channels, they are more than willing to pay such rates which also fit into their business economics. In the lower vintage CV financing (2‐5 year old) and new CV financing, the yields are in the range of 14‐16%. Given the mix of STFC’s portfolio, the blended yield is at 17‐17.5%. While the associated opex and credit cost in older used CV financing is higher, significantly higher yields percolate into a much better profitability as compared to younger used and new CV financing. STFC’s new CV financing customers are largely the existing ones who have upgraded to a new vehicle from an older one. In case of younger used CV financing, the market typically opens up during slowdown as many of the newly entered players exit and large fleet operators downsize their operations. The portfolio mix is expected to move towards older used CVs during the ensuing upcycle.

A measured recovery likely in AUM growth over FY15-18 While STFC’s AUM growth has improved to 11% from 3‐4% about a year back, it is unlikely to accelerate significantly in near term as the underlying growth drivers of rural and urban consumption would take some time to recover. Company is looking to grow its assets base by 12‐15% during the current fiscal. However, the longer term picture is encouraging as economic growth is expected to start reviving meaningfully from FY17 and percolate down to rural economy on the back of government expenditure push and resumption of the capex cycle. The consequent improvement in consumption tends would improve load factor and freight rates for truck operators. As utilization of existing vehicles crosses 90%, SRTOs would start adding vehicles and improved business prospects will attract new entrants. The sharp fall in fuel prices has already improved operating economics for trucker owners. This has been truer in case of older vehicles as manifested in 10‐15% recovery in their prices during the recent months. One of the key reasons why the demand had shifted to new trucks in the last few years was their lower operating cost underpinned by better fuel efficiency.

While the CV industry sales have witnessed distinct improvement over the past year, it has not reflected in asset growth of STFCs as the demand recovery has mainly come from large fleet operators who have upgraded their vehicles. These larger players represent a minority 25‐26% of the CV financing market and majority comprises of SRTOs and owner‐drivers which is the core operating segment of STFC. We estimate a sustained recovery in company’s AUM growth over FY15‐18.

Lending yields and profitability in older used CV financing much higher than younger used CV financing Underlying growth drivers of rural and urban consumption would take some time to recover The customer’s vehicle utilization stands sub‐optimal at near ~80% currently Recent revival in CV industry sales driven by large fleet operators who are not STFC’s customers


5

AUM growth has troughed … further recovery to be gradual

18.6 23.5

25.2

22.0

14.7

6.9

3.5 3.3

6.9

11.3 11.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0 Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)

11.1

23.5

6.9

11.3

14.0

17.0

21.0

0.0

5.0

10.0

15.0

20.0

25.0

FY12 FY13 FY14 FY15 FY16E FY17E FY18E

(%)


NIM could witness a material expansion in the longer term STFC’s NIM has witnessed a more than 100bps contraction since H2 of FY13 on the back of lower realized yield on the securitized portfolio. While share of this portfolio in overall AUM has come down due to moderation in credit growth of the banking system, the yield on this portfolio was impacted by the steep slowdown which impacted cash flows of the borrowers. The company recognizes securitization income on realized basis and the collections have been impacted. The yield on on‐balance sheet portfolio has seen a material improvement from ~16% to 17.5% in the past two years on the back of significant increase in the share of used CV financing in AUM. From 80% as of end FY13, it has risen to 92% currently. The lending yield in case of financing of used CV especially >5 years old is substantially higher as compared to new CV financing. With the borrowing mix remaining steady, the blended cost of funds has moved in a narrow band in the recent past.

The outlook for STFC’s NIM is quite encouraging underpinned by various drivers. The yield on securitized portfolio seems to have troughed out and should improve gradually as the collection efficiency recovers. The blended yield on on‐book portfolio should further improve driven by sustained shift towards used CV financing. On the borrowings side, banks contribute ~38% and thus as Base Rates are lowered, this cost will reduce. While the company has been benefitting from easing in cost of incremental Bonds/CP funding, the recent upgrade in long term credit rating to AAA by CRISIL would bring additional benefits. The incremental cost of borrowing is already 15bps lower than the on‐book cost and an intended shift towards Bond/NCD funding would drive further decline. On the asset side, all loans are at fixed rate and the duration of the portfolio is matched with the liabilities. Though the reported NIM could improve to more than 7.5% in the next couple of years from current 6.8%, company intends to pass‐on most of the benefits above this level to customers.

Yield on on‐balance sheet portfolio has seen material improvement due to increasing share of used CV financing Various drivers for NIMs to expand significantly over FY15‐18 STFC’s long term credit rating has been recently upgraded to AAA by CRISIL


6

NIM (reported) is coming‐off from the lows Securitized portfolio yield (computed) witnessed significant depression

7.4

7.7 7.5

7.2

7.0

6.7

6.5 6.5 6.5 6.6

6.6 6.7 6.8

6.0

6.4

6.8

7.2

7.6

8.0

Q1 FY13

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)

12.2 11.7

9.7 9.1

8.3 7.8

7.2 6.8 7.2

5.7 6.5 6.5

3.0

6.0

9.0

12.0

15.0

Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)


On‐book portfolio yield (computed) has improved aided by mix change

Cost of Funds (computed) has been largely stable off‐late

15.9

15.9

16.8

16.5

17.0 17.9

17.6

17.7

17.8

17.6

17.4

17.4

14.0

15.0

16.0

17.0

18.0

19.0

Q2 …

Q3 …

Q4 …

Q1 …

Q2 …

Q3 …

Q4 …

Q1 …

Q2 …

Q3 …

Q4 …

Q1 …

(%)

12.2

11.3 10.9

11.0

11.5

11.5 11.1

10.9

11.3

10.7

10.8

10.8

9.0

10.0

11.0

12.0

13.0 Q2 FY13

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)


NIM (computed) is estimated to witness significant expansion over FY15‐18

7.7

7.1

7.3

7.8

8.0

8.2

6.0

6.5

7.0

7.5

8.0

8.5

FY13 FY14 FY15 FY16E FY17E FY18E

(%)



7

Persistent investment in network to penetrate deeper

No reduction in Field Officers’ strength

0

150

300

450

600

750

900

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(no)

Branch Offices Rural Centers

8,877

10,057

10,491

11,377

11,243

11,209

10,120

9,681

9,746

9,658

9,403

0

2,000

4,000

6,000

8,000

10,000

12,000

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(no)


Growth and NIM recovery to drive operating leverage Over the past three years, moderation in AUM growth, deterioration in asset quality (impacted income recognition on both on‐book and securitized portfolios) and sustained investment in network (number of branches and rural centers have increased considerably) affected the cost/income ratio which inched‐up to ~26% in FY15 from ~23% in FY12. From here on, as asset growth revives gradually and as the business franchise becomes more productive, the cost/income ratio could moderately come‐off by FY18. Cost productivity measures were impacted by multiple factors

1.3

1.5

1.7

1.9

2.1

2.3

15.0

18.0

21.0

24.0

27.0

30.0

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)(%)

Cost/Income ratio (LHS) Opex/AUM ratio (RHS)


As business franchise turns more productive on growth revival, cost/income ratio will come‐off


8

Macro slowdown putting pressure on asset quality Credit cost has inched‐up; PCR sustained at conservative level

2.9 3.2 3.1

3.3 3.6

3.9 3.7 3.7 3.6 3.8

4.1

0.6 0.8 0.7 0.7 0.8 0.8 0.8 0.8 0.7 0.8 0.9

0.0

1.0

2.0

3.0

4.0

5.0

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)

Gross NPL Net NPL

1.5

1.8

2.1

2.4

2.7

3.0

40.0

50.0

60.0

70.0

80.0

90.0

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)(%)

PCR (LHS) Credit Cost (RHS)


Impact of early NPL recognition on P&L to be minimal STFC has seen its Gross NPL levels increasing significantly since FY13 on the back of a well entrenched economic slowdown which impacted both urban and rural activity and consumption levels. The truckers witnessed a decline in their vehicle utilization which in turn constrained their cash flows to service the loan. Since a large portion of the customers are owner‐drivers earning daily freight, they require 25‐26 days of work to service EMIs comfortably. The vehicle utilization for many customers currently stands at sub‐optimal level of <80%, this needs to sustain at >90% for them to also consider adding a vehicle. While the sharp decline in fuel prices has augmented margins of truck operators, the sub‐optimal vehicle utilization has been making it difficult for them to service all EMIs. The unseasonal rains in March‐end and April impacted winter crop production in key states thus asserting additional pressure on the business of customers and STFC’s asset quality. The company expects pressure on the borrower’s cash flow to stay (but not deteriorate further) in the near term while easing in the longer term as vehicle utilization level moves up driven by a moderate pace of economic recovery.

Pursuant to RBI’s guidelines, STFC would need to shift NPL recognition to 90dpd by FY18 starting with 150dpd by the end of the current fiscal. This 30dpd shift each year till FY18 should result in significant increase in NPL levels if there is no helpful adjustment by the borrowers. The company has been communicating this impending shift to its customers so that they can design some changes in their business model. As per the management, the transition to 90dpd recognition would increase NPL level by 1‐1.5% each year in the current situation. However, it is highly likely that a significant part of this headwind would get offset by easing of cyclical pressures. Further, this transition is unlikely to have any material P&L impact as STFC may choose to reduce its NPL coverage level from a conservative 79‐80%. In such case, the credit cost is estimated to peak out in the current fiscal and moderate in the ensuing two years. STFC does not mind taking the PCR to the level of 40‐45% by FY18 if the credit conditions improve and if there is a sustained recovery in prices of pre‐owned vehicles. However, this would substantially increase the Net NPLs/Networth ratio.

Sub‐optimal vehicle utilization making it difficult for customers to service EMIs Unseasonal rains in March‐April asserted additional pressure on STFC’s asset quality Transition to 90dpd NPL recognition would increase NPL level by 1‐1.5% each year in the current situation STFC would likely choose to reduce its PCR standing at conservative 79‐80%; thus precluding any P&L impact


9

Reported NPLs to substantially increase on shift to 90dpd recognition by FY18

STFC to likely respond by utilizing the PCR buffer

2.9 3.2

3.9 3.8

5.2

6.0 6.3

0.4 0.8 0.8 0.8

1.8

2.9

3.6

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


(%)

Gross NPL Net NPL

1.5

1.7

1.9

2.1

2.3

2.5

0.0

20.0

40.0

60.0

80.0

100.0


(%)(%)

PCR (LHS) Credit Cost (RHS)


Net NPL/Networth ratio will go up significantly by FY18

3.4 3.7 4.1

10.1

15.5

19.6

0.0

5.0

10.0

15.0

20.0

25.0


(%)


Return ratios to improve from cyclical lows STFC’s return ratios have usually oscillated in a wide band across credit cycle. For instance, company’s RoA has declined materially from 4.3% in Q1 FY12 to 2.1% in Q1 FY16 during which the operating environment deteriorated significantly. Thus, recovery in profitability would also be sharp if the operating conditions were to improve from here as estimated. The visibility for RoA improving to 2.7‐2.8% in the medium term is high as NIM in on the ascent and credit cost has peaked. In the longer term, the RoA can improve to 3%+ (mid‐cycle profitability level) on the back of cost productivity and on further scope to retain margin tailwinds. With Tier‐1 capital at 16%+, STFC is well capitalized for a healthy asset growth recovery over the next few years. The company may not require equity capital till FY18 as RoEs would improve to 19‐20% by then driven by an uptick in RoA and financial leverage.

RoE would improve to 19‐20% by FY18 driven by an uptick in RoA and financial leverage


10

Profitability declined on deterioration in operating conditions

Return ratios to recover materially over FY15‐18

0.0

5.0

10.0

15.0

20.0

25.0

0.0

0.8

1.6

2.4

3.2

4.0

Q3 FY13

Q4 FY13

Q1 FY14

Q2 FY14

Q3 FY14

Q4 FY14

Q1 FY15

Q2 FY15

Q3 FY15

Q4 FY15

Q1 FY16

(%)(%)

RoA (LHS) RoE (RHS)

0.0

5.0

10.0

15.0

20.0

25.0

0.0

0.8

1.6

2.4

3.2

4.0


(%)(%)

RoA (LHS) RoE (RHS)


Significant incremental damage in equipment finance business unlikely The significant deterioration in the subsidiary Shriram Equipment Finance’s asset quality during recent quarters has come across as a big negative surprise. On 150dpd basis, Gross NPLs currently stand at ~Rs. 1,000cr translating into ~37% of asset portfolio (~Rs. 2,700cr, 4.3% of consol AUM). Over the past two quarters, company has already provided ~Rs. 270cr for bad loans which has eroded ~50% of Networth. The massive NPL accretion has been largely a function of significant stress faced by construction equipment fleet operators owing to severe slowdown in infra/industrial activity. However, it also raises a question on the risk mitigation framework implemented by the subsidiary which the Shriram Group has impressively managed in other businesses.

Equipment financing business was started by STFC in 2007, and was carved out into a separate subsidiary in 2010 in order to enhance focus. Later, substantial investments were made in human capital for rapidly growing the franchise but unfortunately the operating environment turned adverse. During FY12‐15, the business witnessed a significant deceleration in asset growth and material decline in profitability due to reduction in NIM and operating de‐leverage.

To take corrective measures in equipment financing, STFC has now decided to merge the subsidiary with itself. Over the past 3‐4 months, no new AUM has been created with the sole focus on working out recoveries from the defaulted customers. These efforts are producing encouraging results with the company being able to collect Rs. 80‐90cr per month. While the AUM continues to decline on the back of principal repayments, the management intends to resume growth from November‐December but with a new strategy that would focus on used CEs, low tickets, funding 1 or 2 equipments per customer and developing a close monitoring and collection mechanism. Company does not envisage any significant incremental loss over the provisions already made. The prices of pre‐owned CEs have improved by 8‐10% over the past six months in anticipation of improved demand in the near future. If indeed the infra and construction activity were to pick, then it would not only aid portfolio growth but also accelerate NPL recovery.

On 150dpd basis, Gross NPLs currently stand at ~Rs. 1,000cr translating into ~37% of asset portfolio Growth and profitability was hit during FY12‐15 Focused recovery efforts have produced encouraging results Company does not envisage significant incremental loss over the provisions already made


11

Stock trading at 2.2x 1‐yr rolling fwd P/ABV … which is also the long term mean

0

300

600

900

1,200

1,500

1,800

Apr‐08

Dec‐08

Aug‐09

Apr‐10

Dec‐10

Aug‐11

Apr‐12

Dec‐12

Aug‐13

Apr‐14

Dec‐14

Aug‐15

(Rs)

3.7x

3.0x

2.4x

1.8x

1.1x

‐

0.8

1.6

2.4

3.2

4.0

Apr‐08 Apr‐09 Apr‐10 Apr‐11 Apr‐12 Apr‐13 Apr‐14 Apr‐15

1‐yr rolling P/ABV Mean


Financial snapshot of Equipment Financing Subsidiary Particulars FY12 FY13 FY14 FY15

AUM (Rs cr) 1,923 3,041 3,418 2,999

YoY growth (%) 203.3 58.1 12.4 (12.3)

NII (Rs cr) 114 199 254 190

NIM on AUM (%) 8.9 8.0 7.9 5.9

Cost/Income (%) 25.8 23.0 23.0 37.9

Prov (Rs cr) 7 21 64 323

Credit Cost (%) 0.6 0.9 2.0 10.1

PAT (Rs cr) 52 89 87 (217)

Gross NPL (%) 0.3 1.4 1.3 15.7

Net NPL (%) 0.1 0.8 0.5 6.9

PCR (%) 69.6 44.2 59.7 59.9

Networth (Rs cr) 313 402 489 272

Tier‐1 CAR (%) 16.3 13.2 14.2 9.9

Net NPL/Networth (%) 0.6 6.1 3.5 76.1

RoA (%) 3.9 3.6 2.6 (6.3)

RoE (%) 19.1 25.2 19.3 (46.0) Source: Company, IndiaInfoline Research

Valuation re-rating inevitable in the medium term STFC is currently trading at historical mean valuation of 2.2x 1‐year rolling fwd P/ABV. On the FY18 ABV, the stock valuation is at undemanding 1.8x. Viewing it in terms of the anticipated healthy growth and profitability recovery over the next couple of years, the valuation is attractive for investors. At the start of an upcycle, if an inherently robust and profitable franchise is available at mid‐cycle valuation then it’s a sound case to own it.

Currently trading at historical mean valuation of 2.2x 1‐yr rolling fwd P/ABV


12

Financials Income statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Income from Operatns 8,516 9,993 11,450 13,449

Interest expense (4,403) (5,062) (5,596) (6,273)

Net interest income 4,113 4,932 5,854 7,177

Non‐interest income 71 71 78 86

Total op income 4,184 5,002 5,932 7,262

Total op expenses (1,078) (1,251) (1,463) (1,727)

Op profit (pre‐prov) 3,105 3,751 4,468 5,535

Provisions (1,263) (1,487) (1,573) (1,700)

Exceptional Items 0 0 0 0

Profit before tax 1,842 2,264 2,896 3,836

Taxes (605) (747) (956) (1,266)

Net profit 1,238 1,517 1,940 2,570

Balance sheet Y/e 31 Mar (Rs mn) FY15 FY16E FY17E FY18E

Equity Capital 227 227 227 227

Reserves 9,011 10,239 11,837 13,933

Shareholder's funds 9,238 10,466 12,064 14,160

Long‐term borrow 31,571 36,306 41,389 48,425

Other long‐term liab 971 1,068 1,229 1,413

Long term prov 1,587 1,745 2,007 2,308

Total non‐curr liab 34,129 39,120 44,625 52,146

Short Term Borrow 2,661 3,061 3,489 4,082

Trade payables 1,160 1,276 1,467 1,687

Other current liab 11,742 13,503 15,393 18,010

Short term prov 398 438 503 579

Total current liab 15,961 18,277 20,853 24,358

Equity + Liab 59,327 67,862 77,541 90,664

Fixed Assets 101 111 122 134

Non‐current inv 1,114 1,114 1,114 1,114

Deferred tax assets 256 282 310 341

Long‐term loans/adv 30,823 35,230 39,985 46,589

Other non‐curr asset 93 102 118 135

Total non‐curr asset 32,387 36,839 41,649 48,315

Curr Investments 2,213 2,213 2,213 2,213

Cash & equivalents 4,723 5,950 7,732 9,905

Short‐term loan/adv 19,941 22,792 25,868 30,141

Other current assets 62 69 79 91

Total Current assets 26,940 31,023 35,892 42,350

Total Assets 59,327 67,862 77,541 90,664

Key ratios Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Net interest income 12.1 19.9 18.7 22.6

Total op income 9.7 19.6 18.6 22.4

Op profit (pre‐prov) 8.7 20.8 19.1 23.9

Net profit (2.1) 22.6 27.9 32.5

Advances 30.5 14.3 13.5 16.5

Borrowings 21.1 15.0 14.0 17.0

Total assets 20.5 14.4 14.3 16.9

Profitability Ratios (%)

NIM 7.3 7.8 8.0 8.2

Non‐int inc/Total inc 1.7 1.4 1.3 1.2

Return on Avg Equity 14.1 15.4 17.2 19.6

Return on Avg Assets 2.3 2.4 2.7 3.1

Per share ratios (Rs)

EPS 54.6 66.9 85.5 113.3

Adj.BVPS 390.4 414.7 449.0 501.5

DPS 10.0 11.0 13.0 18.0

Other key ratios (%)

Loans/Borrowings 110.4 109.7 109.3 108.8

Cost/Income 25.8 25.0 24.7 23.8

CAR 20.5 20.4 20.6 20.8

Tier‐I capital 16.4 16.3 16.5 16.6

Gross NPLs/Loans 3.8 5.2 6.0 6.3

Credit Cost 2.3 2.4 2.2 2.0

Net NPLs/Net loans 0.8 1.8 2.9 3.6

Tax rate 32.8 33.0 33.0 33.0

Dividend yield 1.1 1.2 1.4 1.9

‘Best Broker of the Year’ – by Zee Business for contribution to brokingNirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

'Best Equity Broker of the Year' – Bloomberg UTV, 2011IIFL was awarded the 'Best Equity Broker of the Year' at the recently held Bloomberg UTV Financial Leadership Award, 2011. The award presented by the Hon'ble Finance Minister of India, Shri Pranab Mukherjee. The Bloomberg UTV Financial Leadership Awards acknowledge the extraordinary contribution of India's financial leaders and visionaries from January 2010 to January 2011.

'Best Broker in India' – Finance Asia, 2011IIFL has been awarded the 'Best Broker in India' by Finance Asia. The award is the result of Finance Asia's annual quest for the best financial services firms across Asia, which culminated in the Country Awards 2011

Other awards

2012BEST BROKING HOUSE WITH

GLOBAL PRESENCE

2009, 2012 & 2013BEST MARKET

ANALYSTBEST BROKERAGE,

INDIAMOST IMPROVED,

INDIABEST BROKER,

INDIA

2009FASTEST GROWING

LARGE BROKING HOUSE

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +15%

Accumulate – Absolute return between 0% to +15%

Reduce – Absolute return between 0% to ‐10%

Sell – Absolute return below ‐10%

Call Failure ‐ In case of a Buy report, if the stock falls 20% below the recommended price on a closing basis, unless otherwise specified by the analyst; or, in case of a Sell report, if the stock rises 20% above the recommended price on a closing basis, unless otherwise specified by the analyst

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