Slowing loan growth clouds outlook for Shriram Transport

 

Thanks to its focus on rural areas and financing used commercial vehicles, Shriram Transport Finance Co. Ltd remained relatively unaffected by the slump in new commercial vehicle sales. But as the economic slowdown continues and the downtrend in commercial vehicle industry deepens, the competitive advantages are wearing off. Asset growth in the recently concluded March quarter slowed to 7%. In the previous three quarters assets grew by at least 14%.

 

 

As truckers shied away from purchases, the new commercial vehicle assets plunged 34%. The used commercial vehicle assets business continued to grow, but the rate of growth almost halved from 33% in first quarter to 17% in the last quarter of the recently concluded fiscal year.

 

 

Several factors weighed on loan growth. According to a report by broking firm Nomura, low government spending and heavy rains in some states may have reduced demand for loans. “Management indicated that LCV (light commercial vehicle) demand still remains sluggish and agri demand in states like Punjab, 

 

 

Maharashtra and Madhya Pradesh have been impacted due to hailstorms,” Nomura said in a note.

The sharp slowdown in asset growth hit interest income. Net interest margins softened both from a year-ago period and the December quarter. Margins were affected by tax incidence on securitization income. Another reason why margins fell is that a considerable part of incremental loan growth has come from low-yielding assets. “Shriram Transport’s calculated margins declined 10 bps (basis points) sequentially to 6.1% as incremental growth in used vehicles originated from lower vintage vehicles (three-to-five years), where yields are 400-500 bps lower than higher vintage vehicles,” Antique Stock Broking Ltd said in a note. One basis point is one-hundredth of a percentage point.

 

Profit fell 17% to Rs.295 crore, lower than analysts’ expectations. Elevated costs and slowing loan growth is taking a toll on Shriram’s return ratios. From 18.5% in the first quarter, return on equity fell to 14.4% in the March quarter. Similarly, return on assets and interest margins on assets under management eased considerably.

The Shriram management expects loan demand to come back in the second half of the current fiscal year, analysts say. The recovery can be protracted. The resumption of demand is contingent on good rains, and improvement in industrial and mining activities. According to Nomura, demand linked to resumption of mining activity is estimated to kick in only from January 2015. Also, given the overcapacity in the commercial vehicle industry, Antique Stock Broking expects the utilization levels to improve gradually. 

 

The concerns have led to cuts in earnings estimates by some brokerage houses. While the stock is trading at more than two times its book value, proof that loan growth is reviving and interest costs are easing are needed to revive investor interest.

 

Rahul kumar gupta

PGDM,1st Year

Source:-Mint