Emkay Global Financial has given Buy recommendation for Shriram Transport Finance with a target price of Rs. 1490 in its research report issued on Apr 29, 2022

Emkay Global Financial’s report on Shriram Transport Finance

Shriram Transport (SHTF) posted Q4 earnings of Rs10.9bn, 32% above our estimate of Rs8.2bn and 19% above consensus. Operating income came in 6% above our estimate on account of interest write-back of Rs1.06bn (1% beat on our numbers excluding one-off). Used vehicle AUM increased by 70bps as new vehicle disbursements picked up in Q4. NIMs improved on re-pricing of LT debt and higher interest write-back. Lower credit costs (management overlay provision of Rs8bn consumed in Q4) and Rs0.82mn of tax reversals also boosted earnings. The proposed merger with Shriram City (SCUF) is on track and has been approved by BSE & NSE. For FY23, SHTF has guided for 12% YoY standalone growth and 15% growth for the merged entity. SHTF, a leader in pre-owned CV segment financing, accounts for over 25% of the CV market. The company’s growth, risk profile and return potential are tightly connected to this segment. SHTF’s merger with SCUF – a company with higher RoA than SHTF – will add additional profitable growth drivers to an otherwise uni-segment business. It will not only improve the credit rating profile of the business but also create a more diversified play on the broader below-prime segment in India. The staff cross-pollination underway on a pilot basis and management commentary give us confidence about a successful merger execution.

Outlook

We retain our Buy rating on SHTF with a revised Mar’23 TP of Rs1,490, using the excess return on equity (ERE) method for FY23E-24E RoE of ~14%, implying 1.2x Mar’24E BVPS. Our TP revision is mainly driven by an increase in the cost of equity from 13.25% to 13.5%.

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