Shriram Transport Finance: An Opportunity Or Not
Shriram Transport Finance (CMP: Rs 1492, Market Cap: Rs 40,371) has not been able to deliver the returns which are being expected from the company, with the stock down 1 percent against a 14 percent rally in the Nifty in the last ten months. Saying it as a non-potential business is not correct until we dive deep into the business, check its fundamentals, and then value it.
As far as Q2FY22 results are concerned, the company has shown robust growth in terms of net interest and keeping lower provisions as their asset quality is increasing with every quarter. There is an increase of 8% YOY in NII, which is promising in today's scenario where FIIs are continuously selling. Core operating profit has increased 9% YOY along with only a 3% YOY increase in loss loan provision, which is impressive.
If we deep dive into its business model following are the things which should take into consideration before making any decision-
1) Decent growth of the used-vehicle market –
Pandemic has impacted almost all the sector either positively or negatively. Only some of the businesses were impacted positively, including the used car business. There was a greater demand for used car vehicles as more and more people preferred to travel in their vehicles. Moreover, with economic recovery expected soon, customers' cash flow is looking up. If we look into the data, 91% of their AUM is of Used vehicles, which is good.
Moreover, the management is positive of double-digit growth in the second half of the year, which will be supported by an increase in rural spending, government spending on infrastructure, and the resume of industrial activities.
2) NIM improves, and outlook is positive-
Q2 results show an increase in interest income along with improving asset quality. Still, the most attractive thing is the redeployment of cash(of around 17,000 cr) in the coming two quarters they are planning. If it is deployed rightly, it could further increase income in the coming years.
The cost of funds has decreased substantially by 25 basis points, which are said to further decline by 15-20 basis points, which is a positive sign as more cash is available at a lower cost.
3) Access to diversified funding-
Shriram Transport Finance is a large deposit-taking NBFC with a broad, extensive, and diversified funding base, including bonds, Public deposits, and securitization.
4) Asset Quality improvement-
Two things are essential for any money lending company's health: AUM / Collection and NPA, and Shriram Finance has been impressive on both sides. Collection in Sep '21 has touched 99 percent, with NPA declining to 7.82 percent. The provision for NPA is Rs 6249 cr, i.e., healthy 49%, which is far above the norms. This shows the conservative nature of the management. The management is also positive in further decreasing this NPA to below 7 percent and decreasing the Cost of Credit to 2% from 3% currently in the coming quarters.
Overall we can see that there is a vast potential for growth in the industry, and the management is also very promising in terms of the future it sees for the company. However, the management has not given proper commentary of putting two listed entities in one umbrella to provide them with better credit ratings, funds, etc. This is a matter investors need to look at. Thus, the stock is significantly undervalued, and there is massive potential for investors to make money in this entity in the long run.