The Hindu Business Line : Shriram Transport Finance Corporation

Those with high risk appetite who are looking for fixed income options can consider investing in Shriram Transport Finance’s three-year cumulative deposit scheme, which offers 10.5 per cent interest.

Shriram Transport Finance Corporation (STFC) is an asset financing deposit-taking non-banking financial company regulated by the RBI, which predominantly caters to the funding needs of the pre-owned truck and new truck segments. Strong profit growth with high return on assets (2.99 per cent), high net interest margin (7.17 per cent), high interest coverage ratio and fewer slippages in the loan book despite the slowdown in the auto sector are the key investment arguments.

The interest rates offered by Shriram Transport are among the highest in term deposit schemes by any organised player. The rates offered by banks is between 7 and 9 per cent for tenures between one and three years. What makes the company fixed deposits more attractive is its quarterly compounding, which increases the yields significantly especially for deposits with longer durations.

Fitch has assigned tAA (investment grade) credit rating for the fixed deposit scheme of STFC which denotes low credit risk.

Schemes offered

Of the various fixed deposit options offered by STFC (see table), the cumulative schemes look attractive as they compound the interest payments quarterly and also eliminate reinvestment risk.

At a 10.5 per cent pre-tax interest rate, the scheme is available for three-year, four-year and five-year periods. We recommend a scheme with lower duration as the interest rates may start rising above the current levels over the next couple of years.

For cumulative deposit, interest is paid at maturity. In a non-cumulative deposit, the interest is paid quarterly or monthly. In both the cases the interest received is compounded quarterly. Tax is deducted on interest received.

For instance, for a 10.5 per cent three-year cumulative option, quarterly compounding gives a yield of 10.9 per cent pre-tax. However on an accrued tax basis, for an investor falling in 10 per cent, 20 per cent and 30 per cent tax brackets, the post-tax yields fall to 9.9 per cent, 8.9 per cent and 7.8 per cent respectively.

If the investor requires a steady stream of income, a non-cumulative scheme is available at same interest rate with quarterly and monthly payment options. The minimum amount to be invested in these deposits is Rs 25,000.

STFC’s net profit grew by 54.5 per cent over 2004-09 while assets under management grew by 44.1 per cent, both compounded annually, in the same period.

Though the asset growth moderated (20 per cent in 2008-09) due to the slowdown, net profit for 2008-09 grew at 57 per cent year-on-year on the back of high growth in net interest income growth and securitisation income.

The company operates on high net interest margin due to the risky nature of the asset book which comprises of 75 per cent pre-owned truck loans; rest of the contribution comes from new truck segment. Despite the risky nature of the business, the asset quality remains quite strong with a net NPA ratio of 0.8 per cent.

The deposit mix in STFC’s borrowing portfolio has significantly come down from 73 per cent in FY05 to 17 per cent in FY09 as the retail deposits couldn’t match the growing funding needs.

Risks

Unlike bank fixed deposits, the fixed deposits of STFC are not insured but a 15 per cent statutory liquidity ratio requirement on total deposits, provides a cushion. Its interest coverage ratio which is 1.88 also makes it a reasonable option.

In terms of business risk, high slippages in the pre-owned truck portfolio cannot be ruled out, but relaxation of repossession norms governing NBFCs may help in easier recovery of assets.

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