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Shriram Transport Finance Equity Research

HomeCompanyShriram Transport Finance Equity Research

Date of Research – 21 January 2016

Price – Rs. 741.50

About the Company

Incorporated in the year 1979 and registered as a deposit taking NBFC with Reserve Bank of India (RBI), Shriram Transport Finance Company Limited (“Shriram Transport Finance” or the “Company”) is the flagship company of the Shriram group which has a significant presence in the consumer finance, life insurance, distribution of financial products such as life and general insurance products and units of mutual funds and stock broking businesses.

Apart from these financial services, the group is also present in non-financial services business such as property development, engineering projects and information technology.

The Company is the holistic finance provider for the commercial vehicle industry and seeks to partner with small truck owners for every possible need related to their assets. Shriram has a pan India presence with 620 branch offices. Headquartered at Mumbai, the Company manages assets over Rs 53,700 Cr. and has a customer base exceeding 10 lacs.

Key Financial Figures

Consolidated (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015  FY 2016 FY 2017
Total Income from Operations 7,014.42 8,476.02 9,176.99 10,307.63  10,902.71 
Expenses 1,776.86 2,274.73 2,812.26 3,428.92  3,745.85  
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 5,237.56 6,201.29 6,364.73 6,878.71  7,156.86  
Depreciation 22.71 32.78 43.15 37.63  34.87
Finance Costs 3,053.73 4,202.21 4,674.65 5,057.92  5,185.70  
Other income 1.53 4.17 2.62 6.12  1.76
PBT 2,162.65 1,970.47 1,649.55 1,789.28  1,938.05
Tax 698.77 612.53 621.11 605.66  672.42  
PAT (before Minority Interest and share of Associates) 1,463.88 1,357.94 1,028.44 1,183.62  1,265.63  
Profit/ (loss) attributable to Minority Interest –  – 
Share of profit / (loss) of Associates 0.46 –  – 
Consolidated Profit / (Loss) for the year 1,463.42 1,357.94 1,028.44 1,183.62  1,265.63  

Profitability Analysis

Consolidated (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 74.67 73.16 69.36 66.73 65.64 
Net Profit Margin Ratio 20.87 16.02 11.21 11.48 11.61 

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Share Capital 226.32 226.89 226.91 226.91 226.91 
Share Capital (Other than Equity) – 
Reserves & Surplus 5,806.32 7,110.98 8,283.27 9,038.91 9,948.58 
Net worth (shareholders funds) 6,032.64 7,337.87 8,510.18 9,265.82 10,175.48 
Long term borrowings 15,160.25 20,043.37 23,962.08 32,855.58 30,268.89 
Current liabilities 12,630.43 17,430.04 17,559.03 17,188.61 23,562.91 
Other long term liabilities and provisions 3,214.53 2,838.33 2,291.10 2,843.61 4,006.19 
Total Liabilities 37,037.85 47,649.61 52,322.39 62,153.61 68,013.47 

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
Fixed Assets 53.66 72.26 154.83 154.26 152.11 
Noncurrent Investments 272.08 303.66 397.80 824.26 1,222.51 
Current assets 19,861.43 25,169.75 27,650.13 28,342.95 23,302.81 
Long term advances and other noncurrent assets 16,632.33 21,816.82 23,864.06 32,574.36 43,027.16 
Deferred Tax Assets 218.34 287.13 255.56 257.78 308.87 
Total assets 37,037.85 47,649.61 52,322.39 62,153.61 68,013.47 

Efficiency Analysis

 
Particulars FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 
ROCE 21.26 19.13 19.10 15.11 17.01 
ROE / RONW 21.70 19.94 15.96 11.10 11.63 

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Consolidated
Particulars FY 2013 FY 2014 FY 2015 FY 2016  FY 2017
Total Income from Operations (Rs. Cr.) 7,014.42 8,476.02 9,176.99 10,307.63  10,902.71 
Growth (%) 13.37 % 20.84 % 8.27 % 12.32 %  5.77 % 
PAT (Rs. Cr.) 1,463.88 1,357.94 1,028.44 1,183.62  1,265.63 
Growth (%) 11.85 % (7.24 %) (24.26 %) 15.09 %  6.93 % 
Earnings Per Share – Basic (Rs. ) 64.52 59.85 45.33 52.17  55.78 
Earning Per Share – Diluted (Rs. ) 64.51 59.85 45.33 52.17  55.78 
Price to Earnings 10.79 12.48 17.96 18.28  17.86 

Dividend History

The Company has maintained an average dividend yield of 1.06 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. Shriram’s average current ratio over the last 5 financial years has been 1.55 times which indicates that the Company is comfortably placed to pay for its short term obligations.

Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

Shriram’s average long term debt to equity ratio over the last 5 financial years has been 2.84 times which indicates that the Company operates with a high level of debt. A high long term debt to equity ratio is normal for a company which is primarily engaged in the business of finance and lending.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

Shriram’s average interest coverage ratio over the last 5 financial years has been 1.61 times which is optimal for a Company which is in the business of finance and lending.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, Shriram Transport reported a promoter holding of 26.08 %. The size of promoter holding in a company indicates sincerity and the level of control of the promoters.

At the same time, institutional holding in the Company stood at 55.66 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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