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Religare Securities
Shriram Transport (Buy)
CMP: ₹1,095.25
Target: ₹1,500
We believe Shriram Transport Finance (SHTF) is the best stock to play the CV recovery. Our Auto analyst expects M&HCV volumes to grow by about 20 per cent in FY16/FY17. We believe SHTF’s disbursement growth will outpace M&HCV volume growth due to narrowing vehicle discounts (currently 5-7 per cent), an increase in LTVs (down 5-7 per cent since FY11 peak) and higher churning of older vehicles (>5 years) where SHTF has a dominant position. Credit costs have been running at ₹300 crore per quarter for the last one year and we expect the trend to continue for the next 2-3 quarters. We conservatively estimate a 20 bps decline in credit cost as a percentage of AUM each in FY16 and FY17.
Though growth will be modest till H1FY16, we expect a sharp improvement in disbursement, margins and credit cost once we hit the middle of the CV upcycle in late FY16 or early FY17, led by 1) stronger CV replacement demand; 2) a higher churn rate in used vehicles (SHTF’s stronghold); and 3) lower delinquencies. We model for a 30 per cent earnings CAGR over FY15-FY17.
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