Buy Shriram Trans; target of Rs 738: Networth Stock Broking

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Buy Shriram Trans; target of Rs 738: Networth Stock Broking

Networth Stock Broking is bullish on Shriram Transport Finance Corporation and has recommended buy rating on the stock with a target of Rs 738 in its September 23, 2011 research report.

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Networth Stock Broking is bullish on Shriram Transport Finance Corporation and has recommended buy rating on the stock with a target of Rs 738 in its September 23, 2011 research report.

"Shriram Transport Finance Company Ltd. (STFC or the Company) is one of the largest asset financing NBFC with approximately 20-25% market share in pre-owned Commercial Vehicle (CV) and approximately 7-8% market share in new truck Financing."

"Regulatory changes proposed by RBI are marginally detrimental to STFC. The increase in Tier I CAR (%) limit to 15% (previously 12%) has no significant impact as the Company consistently maintains its Tier I CAR above 16%. However, removal of small truck loans from Priority Sector Lending (PSL) and tightening of provisioning requirements impact the ROE and NIMs significantly. Securitization is expected to fall adversely which will in turn affect the cost of funds. We have assumed increase of 130 bps in cost of funds for FY13E (from FY11). With tightening of provision norms we have assumed an increase of 100bps in GNPA Ratio for FY12E (constant in FY13E) Assuming that all the regulatory proposals are cleared by RBI and therefore estimating profitability using conservative assumptions still lead to attractive ROE. We have derived a ROE level of 24% (400 bps decline from FY11) which is still above the peer group average of 22%."

"The stock price of STFC has currently dipped by over 37% since November 2010 and 22% YTD due to the growing uncertainties. With STFC's niche business model catering to pre owned CV along with the Company's solid capitalization and ROE, we feel the worries are over done. Assuming that all the regulatory proposals are cleared by RBI and estimating growth using conservative assumptions, the valuations still appear attractive at this level. We have used the 2 stage Gordon Growth Model and derived a P/BV multiple of 2.3x FY13E BVPS. We also valued the other business at 2x P/BV. We therefore rate the Company BUY with target price of Rs 738 per share (20% upside from CMP)," says Networth Stock Broking research report.

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To read the full report click on the attachment