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Motilal Oswal
Shriram Trans (Buy)
CMP: ₹734.40
Target: ₹885
Sharp decline in manufacturing, infrastructure and investment activities, impacted CV sales, exerting pressure on profitability of CV financiers leading to drop in return ratios. We met management of Shriram Transport Finance (SHTF) management for clarity on growth, asset quality and profitability of the company.
Key takeaways: Incremental data points such as a) increase in freight rates; b) improved utilisation levels; and c) exit of new and non-serious players are initial signs that worst may be behind for CV cycle. Collections are improving; however, sustaining the momentum is critical. Growth to remain moderate in the near-term and to be driven by non-MHCV segment; El Nino factor — the biggest risk.
Return ratios are at cyclical low, with decadal high credit cost and lowest margins. However, we expect gradual improvement as stability in business and regulatory side is emerging. SHTF trades at 40 per cent discount to peers such as M&M Finance and 20 per cent discount to its historical average of 1.8x. SHTF is well placed to ride the up-cycle with niche customer segment, strong presence in used CV financing and healthy capitalisation.
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