Shriram Transport is the market leader in organised commercial vehicle financing. The company's stock has fallen more than 10% from its 52-week high. However, the CV market is on an uptrend.

The stock fell on fears that increase in load factors for commercial vehicles may impact sales. There are also concerns that a move towards IND AS based reporting of financial results may impact the company.

Under IND AS, the incremental slippages of last three years, ex-recovery expectations, have to be written-off from their net-worth.

What are the key triggers for revival?

In FY18, the overall CV industry sales surpassed their highs of FY12. FY18 sales stood at 8.6 lakh units vs 8.1 lakh units in FY12. The growth in CV sales were also the highest in last 7 years! In the last few qtrs., CV manufacturers have registered a strong growth from a negative of 9% in Q1FY18 to 31% in Q4FY18.

What is going right for Shriram Transport?

The company's quarterly disbursement in fourth quarter was Rs 15, 122 crore. The disbursement to assets under management (AUM) ratio i.e. how much of disbursements goes into AUM after repayment, is at 35%. This is best in two years.

If one annualises that for FY19, then disbursements for FY19 will be at Rs 60, 500 crore. At disbursement to AUM ratio of 35%, this translates into AUM growth of 22-23% for FY19.

With the worst of asset quality woes behind, company expects 70 basis points decline in credit costs for FY19 i.e. provision for NPA divided by loan ratio.

The urban centres of Shriram Transport is seeing good demand which will drive growth at 10-12% as mentioned in their FY18 presentation.

With rural economy picking up, the company is seeing 35-40% growth in rural markets, which contribute to nearly a third of its business. The company said to have added 200 rural branches in FY18 alone.

Apart from the above factors, the re-sale vehicle rates have firmed up which will lead to lower credit losses in terms of re-sale of possessed vehicles.

Research firm CLSA has a 'sell' rating on the stock with a target price of Rs 1210. It believes rural execution is the key and aggressive growth in rural posses asset quality risk.

Morgan Stanley has an 'overweight' rating with a target price of Rs 2000. They see earnings per share (EPS) growth at 52% compounded annual growth rate (CAGR) over FY18-20 along with return on equity at 20% during the same period. They say that non-performing asset (NPA) coverage is high and see valuation re-rating for the stock.

Motilal Oswal has a 'buy' rating with target price at Rs 1950. They believe that return ratios are just off cyclical lows and margin compression is overplayed.

Looking at comparing the company with its peers, Shriram Transport is off 40-45% in terms of valuation as against Cholamandalam Investment. Shriram Transport is valued at price to book value (P/BV) of 2.3 times of FY19 in comparison to 4.2 times for Cholamandalam Investment.

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First Published:Jun 22, 2018 10:22 AM IST