We met the management of Shriram Transport Finance (SHTF) and returned with renewed optimism on its business prospects. Over the past few years, while CV volumes have been stagnant, there has been a marked shift in mix towards higher-tonnage vehicles. In addition, price hikes in the past two years have been healthy (18-20% on new vehicles). While the addressable market size for SHTF in terms of volumes will remain largely stable, we believe better pricing and mix will drive disbursement and AUM growth. AUM is likely to grow 18-19% in FY18 as compared to the management’s earlier guidance of 15% growth. We keep our FY18 AUM growth estimate of 18% unchanged, but modestly increase FY18-20E AUM CAGR to 17%. The management believes that used CV pricing will at least remain firm (or might even improve) over the next 3-4 years as a result of pricing increases in new CVs stemming from BS4, and subsequently, BS6 implementation. This is unlike the past few years, when used CV prices were under pressure. This will help SHTF in two ways: (a) AUM growth will remain steady, and (b) ultimate losses from sale of repossessed vehicles will be lower than before.
Outlook
After seven years of unchanged profits (INR12b-13b), we expect SHTF to report INR18b PAT in FY18, and subsequently, INR25b/INR31b in FY19/FY20. RoA (on AUM)/RoE should improve from the lows of 1.7%/11.7% in FY17 to 2.7%/19% in FY20. At 2.0x FY20E BV, we believe the stock is attractively priced, given AUM growth of 17-18% and RoE of 18-19%. We increase our FY19-20 EPS estimates by 6-7%. We value the company at 2.5x FY20E BV, and could look to further revise the multiple if performance exceeds our expectation. BUY with a TP of INR1,925 (2.5x FY20E BV).
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