SHRIRAM_TRANSPORT_FINANCE(SHTF.IN)：INITIATE_N：NEAR-TERM_CHALLENGES_BUT_FUNDAMENTALS_INTACT-2013-01-17.ppt

,company report,fig diversified financial services equity india,abc global research,shriram transport finance (shtf in) neutral,target price (inr) 834.00 share price (inr) 793.95 forecast dividend yield (%) 1.1 potential return (%) 6.1 note: potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield,initiate n: near-term challenges, but fundamentals intact securitisation and credit risk mitigation helped shtf emerge stronger from the fy09 crisis and fy12 mining sector problems, respectively,mar hsbc eps,2012 a 2013 e 55.58 60.97,2014 e 72.42, tightening regulations in the near term could structurally,hsbc pe performance absolute (%) relative (%),14.3 1m 8.4 5.2,13.0 3m 23.3 15.7,11.0 12m 48.3 20.3,restrict profitability, but it should still remain at healthy levels initiate neutral with a target price of inr834, implying a,note: (v) = volatile (please see disclosure appendix) 17 january 2013 tejas mehta* analyst hsbc securities and capital markets (india) private limited +9122 22681243 tejasmehtahsbc.co.in sachin sheth* analyst hsbc securities and capital markets (india) private limited +91 22 2268 1224 sachinshethhsbc.co.in todd dunivant* head of banks research, asia pacific the hongkong and shanghai banking corporation limited +852 2996 6599 .hk view hsbc global research at: *employed by a non-us affiliate of hsbc securities (usa) inc, and is not registered/qualified pursuant to finra regulations issuer of report: hsbc securities and capital markets (india) private limited disclaimer & disclosures this report must be read with the disclosures and the analyst certifications in the disclosure appendix, and with the disclaimer, which forms part of it,potential return of 6.1% resilient profitability in recent crisis: with a market share of over 25%, shtf is a dominant player in indias used commercial vehicles (cv) finance market where entry barriers are high. despite significant growth opportunity, aum growth has been consistently calibrated to prevailing macro conditions. in fy10-12, aum (on/off balance sheet loans) growth slowed, but roa improved from 2.8-3% to 3.5-4% owing to higher securitisation post the liquidity crisis of fy09 and the mitigation of credit risks by exiting the mining sector portfolio in fy12. regulatory risks to growth and profitability: based on our economists macro expectations, aum growth should remain stable at 15-17% in fy13-15, with further support coming from the recent diversification into equipment finance business. however, the revised securitisation norms should partially pull back its margins to pre-fy10 levels. we therefore expect net interest margins to settle at 8.2% versus the 8.6% average seen over fy10-12, although continuing bank demand for priority sector loans could revive the market over the medium term. similarly, tighter npl recognition norms would, if finalised, lead to one-time doubling of gross npls to 6.5-7% this year and lower profitability, although economic profits should not be affected. excluding the impact of revised npl norms, eps would grow at a 19% cagr in fy13-15e with roa and roe moderating to 3.5% and 20.5% from 3.7% and 23% in fy12, in line with consensus. npl norms, if finalised, could further lower roa and roe to 3-3.2% and 18-19% in fy15e, respectively; these are not factored in our current estimates. initiate neutral: over the past 12 months, shtfs 12-month forward multiples have declined from three-year averages of 11x pe and 2.3x pb to 9.5x pe and 1.8x pb due to high interest rates and regulatory risks. they have recently improved back to the three-year levels, helped by the broader market rally. we believe this rerating is not sustainable due to continuing regulatory risks and the overhang from tpgs impending exit from shtf. therefore, compared to current valuations, we value shtf at lower 12-month forward multiples of 10x pe and 1.9x pb. blending these with our epm assumptions and factoring in the impact of npl norm changes, we arrive at a target price of inr834. key downside risks: rates rigidity, higher slippages, regulatory risks. key upside risks: higher securitisation, better margins. index bombay se idx index level 19,987 free float (%) 59 ric srtr.bo market cap (usdm) 3,306 bloomberg shtf in market cap (inrm) 180,111 source: hsbc source: hsbc,shriram transport finance (shtf in) diversified financial services 17 january 2013 financials & valuation,abc,year to,3/2012a,3/2013e,3/2014e,3/2015e,year to,3/2012a,3/2013e,3/2014e,3/2015e,p&l summary(inr m),growth (y-o-y %),net interest income non-interest income i income from term deposits i income from investment misc income total operating income operating expense staff costs other oper expense ppop provisions provision for npas other other non-oper profit(loss) hsbc pbt exceptionals profit-before tax taxation pat minorities + pref dividend attributable profit hsbc attributable profit balance sheet summary (inrm) total assets customer loans (net) i investment assets other assets total liabilities customer deposits debt securities issued other liabilities total capital ordinary equity minorities + other capital iea (avg) ibl (avg) capital adequacy (%) rwa (inrm) tier 1 tier 2 total capital per share data (inr) eps reported (fully diluted) hsbc eps (fully diluted),31,904 2,362 494 1,821 47 34,266 7,835 3,701 4,134 26,431 7,622 7,604 18 18,809 18,809 6,235 12,574 - 12,574 12,574 357,775 219,813 39,544 98,418 297,852 231,274 66,578 59,923 59,923 327,775 215,045 417,257 14.4% 7.9% 22.3% 55.6 55.6,34,901 1,949 370 1,519 59 36,849 8,245 3,817 4,428 28,604 8,008 7,990 18 20,596 20,596 6,797 13,799 - 13,799 13,799 426,520 300,739 33,325 92,456 354,651 283,606 71,045 71,869 71,869 380,460 257,440 511,824 14.0% 6.8% 20.8% 61.0 61.0,40,254 2,064 407 1,595 62 42,318 8,764 4,008 4,755 33,554 9,090 9,071 19 24,464 24,464 8,073 16,391 - 16,391 16,391 518,309 383,418 37,614 97,277 432,299 354,931 77,368 86,009 86,009 457,883 319,269 647,886 13.3% 5.8% 19.0% 72.4 72.4,46,405 2,176 436 1,675 65 48,581 9,343 4,246 5,097 39,238 10,015 9,995 20 29,223 29,223 9,644 19,579 - 19,579 19,579 616,535 471,681 42,511 102,343 513,594 429,805 83,789 102,941 102,941 549,469 392,368 801,496 12.8% 5.0% 17.9% 86.5 86.5,net interest income non-interest income operating expense ppop provisions pbt pat customer loans (net) total assets rwa customer deposits ratios (%) nim gross yield cost of funds spread npl/gross loans credit cost coverage npl/rwa provision/rwa net write-off/rwa npl/nte net loans/total assets rwa/total assets avg iea/avg total assets avg ibl/avg total liab cost/income non-int income/total income roaa (including goodwill) roae (including goodwill) return on avg tier 1 leverage (x) valuation data pe (diluted eps) p/ppop p/bvps p/nte dividend yield (x) p/asset,9.6 22.2 6.1 11.7 47.4 1.7 2.2 10.7 13.1 26.5 8.49 17.96 11.45 6.52 3.16 3.64 85.9 1.66 1.83 11.58 61.44 1.17 97.25 63.81 23.3 6.89 3.73 23.08 23.08 6.2 14.29 6.80 3.00 3.00 0.82 0.50,9.4 (17.5) 5.2 8.2 5.1 9.5 9.7 36.8 19.2 22.7 8.22 17.33 11.29 6.03 3.18 3.07 83.0 1.87 1.56 13.32 70.51 1.20 97.02 65.65 22.8 5.29 3.52 20.94 20.94 6.0 13.02 6.28 2.50 2.50 0.88 0.42,15.3 6.0 6.3 17.3 13.5 18.8 18.8 27.5 21.5 26.6 8.26 16.93 11.03 5.90 3.35 2.65 80.0 1.99 1.40 14.98 73.97 1.25 96.92 67.58 21.1 4.88 3.47 20.76 20.76 6.0 10.96 5.36 2.09 2.09 1.07 0.35,15.3 5.4 6.6 16.9 10.2 19.5 19.5 23.0 19.0 23.7 8.18 16.59 10.85 5.74 3.46 2.34 78.0 2.04 1.25 15.87 76.51 1.30 96.84 69.15 19.6 4.48 3.45 20.72 20.72 6.0 9.18 4.58 1.75 1.75 1.26 0.29,dps nav,6.5 264.8,7.0 317.5,8.5 380.0,10.0 454.8,price relative,nav (including goodwill),264.8,317.5,380.0,454.8,958,958,roaa deconstruction,858,858,net interest income total interest income total interest expense income from investment,9.47 16.77 7.30 0.54,8.90 16.31 7.41 0.39,8.52 15.97 7.45 0.34,8.18 15.68 7.50 0.30,758 658 558,758 658 558,other income operating income operating expenses staff costs other oper exp ppop provisions non-op items pbt,0.16 10.17 2.32 1.10 1.23 7.84 2.26 - 5.58,0.11 9.40 2.10 0.97 1.13 7.29 2.04 - 5.25,0.10 8.96 1.86 0.85 1.01 7.10 1.92 - 5.18,0.09 8.56 1.65 0.75 0.98 6.92 1.76 - 5.15,458 358 2011 2012 shriram transport finance source: hsbc note: price at close of 14 jan 2013,2013 rel to bombay se sensitive index,458 358 2014,taxation pat,1.85 3.73,1.73 3.52,1.71 3.47,1.70 3.45,2,4,shriram transport finance (shtf in) diversified financial services 17 january 2013 contents investment summary valuation dupont analysis business analysis disclosure appendix disclaimer,8 12 16 33 35,abc 3,1984,1985,1986,1987,1988,1989,1990,1991,1992,1993,1994,1995,1996,1997,1998,1999,2000,2001,2002,2003,2004,2005,2006,2007,2008,2009,2010,2011,2012,2013e,2014e,shriram transport finance (shtf in) diversified financial services 17 january 2013 investment summary a well-established player in the used cv market, which has high barriers to entry growth and profitability supported by inherent market opportunity, strong risk management practices and higher securitisation regulatory challenges to limit profitability to 3-3.2% roa and 18- 19% roe on our estimates,abc,a strong, well-established player with stable growth and a profitable business model used cv: a large and resilient market the cv industry remains a compelling long-term growth story as it is highly correlated to the economic growth of india. within the broader cv market, the used cv,cash-and-carry businesses such as agriculture, where demand is less elastic to economic fluctuations. this is supported by other factors such as a growing cv pool, the aspiration among drivers to become owners, low emi, the steady flow of transport demand and high freight rates. as a result, the used cv market has been growing steadily and is likely to continue to do so in the near future, implying healthy prospects for incumbents.,segment is the bigger than the new cvs segment as it is the aggregate of cvs on the road with a vintage of 5-15 years. the used cv market caters mainly to chart 1: cv pool growth and used cv pool growth showing much more stable trends than new cv growth 50% 40% 30% 20% 10% 0% -10% -20% -30% -40%,4,source: siam, hsbc,new cv sales grow th,cv pool grow th,used cv pool grow th,fy13e,fy14e,fy15e,fy07,fy08,fy09,fy10,fy11,fy12,shriram transport finance (shtf in) diversified financial services 17 january 2013 shtf strengths = high entry barrier with a total assets under management (aum) (on- book + off-book loans) of around inr440bn, shtf today is the largest among the organised players, having a market share of over 25% in the used cvs space against a share of only 10-15% for other organised players such as banks; unorganised private financiers still enjoy a share of around 55-60% (source: shtf), implying a huge growth opportunity. over the past 30-35 years, shtf has slowly but surely increased its dominance by developing a business model around factors that keep entry barriers high such as valuation of the vehicle, checking the authenticity of buyers and sellers, servicing unbanked customers with no credit history, and physical collection and recovery mechanisms. we do not foresee any immediate increase in competition and therefore expect shtf to continue dominating the used cv space in the foreseeable future. we expect calibrated aum growth, supported by diversification over 80% of shtfs aum is linked to cash-and- carry goods operators, a segment where demand is usually fairly resilient to economic growth cycles. shtf mainly finances used lcv and scv (16 tonnage cv), and vehicle demand has been more resilient in this than in other segments due to improving last-mile connectivity. chart 3: aum growth highly correlated to iip and gdp growth,despite the high growth opportunities, shtfs aum growth has always been calibrated to the prevailing economic scenario to avoid taking undue risks during a downturn like the fy09 crisis and fy12 economic slowdown. based on our economists expectations of a gradual revival in gdp and iip in the coming quarters, we think shtf is likely to grow aum at a cagr of around 15-17% over fy13-15e. while shtf has entered into a host of other vehicle segments, construction equipment has been the winner. housed under a separate subsidiary since fy11, its aum has already grown to around 5% of consolidated aum. given its small size, we expect high growth to continue and expect its share to increase to around 9-10% of consolidated aum by fy15e. on a consolidated basis, we therefore expect aum to grow at a 17-19% cagr over fy13-15e. high securitisation + steady asset quality = healthy profitability shtf differs from its peers in the way that it generates returns. its high securitisation policy (45% of aum in fy12) coupled with a tightly controlled risk management process has helped it to improve margins, keep credit costs stable and improve profitability over the past three years. even in fy12, when it faced losses from defaults in its mining sector portfolio as well as a slight deterioration in asset quality, it was able to deliver,abc,75% 60% 45% 30% 15% 0%,20% 15% 10% 5% 0%,roa of 3.7% and roe of 23% after writing off losses. going forward, recent and upcoming regulatory changes and the continuing economic slowdown should affect its profitability, though we expect the impact to be moderate.,aum grow th (yoy%),gdp (rhs),iip (rhs),source: company data, hsbc 5,fy01,fy02,fy03,fy04,fy05,fy06,fy07,fy08,fy09,fy10,fy11,fy12,fy13e,fy14e,fy15e,shriram transport finance (shtf in) diversified financial services 17 january 2013 regulatory challenges ahead, but moderate impact on profitability chart 4: profitability trends,securitisation, margins could fall around 40-50bp y-o-y. accordingly, we expect margins to settle at around 8.2% versus the earlier range of 8.5- 8.75%, while roa could decline to around 3.4- 3.5% from an earlier range of 3.5-4%. that would,abc,35% 30% 25% 20% 15%,roe,roa (rhs),4.5% 4.0% 3.5% 3.0% 2.5% 2.0%,push roe down to 21% from 23% in fy12. over the medium term, however, demand from banks for securitised papers for their priority sector requirements remains high, which could lower the impact on margins by fy15e, though we are not building that into our estimates until there are visible signs of things improving. change in npl recognition and,source: company data, hsbc estimates limited impact on margins from revised securitisation norms compared to peers, shtf will be more affected by the recent revision of securitisation norms, given that 45% of its aum was off-book in fy12 higher than for most non-banking financial companies (nbfcs). securitisation has boosted shtfs margins by around 200 bps, which implies a nim improvement of around 80-100bp on a blended basis. following the changes, credit enhancement is no longer allowed for direct assignment (80% of,provision norms to affect reported asset quality shtfs asset quality is likely to be affected on two fronts: the ongoing economic slowdown would lead to an increase in gross npls, from 3% in fy12 to 3.5% by fy15e, on our estimates, though we expect credit costs to remain at around 275bp. in addition to this, the reserve bank of india (rbi) plans to increase the standard asset provisions from 25bp to 40bp, which would also affect the bottom line. table 1: impact of 90-day npl recommendations,shtfs sell-downs were direct assignments until,fy15e,increase in gross npl ,now), while minimum holding period (mhp) and minimum retention ratio (mrr) restrictions have been imposed. moreover, an 8% cap has been set,assumed increase increase in gross npls new gross npl ratio,(inr mn) %,scenarios 50% 75% 100% 8,167 12,251 16,335 5.19 6.05 6.91,on spreads between the investing banks base rate and the portfolio yield of priority sector loans, and the income tax department has raised taxation,impact on nii impact on margins additional provision hit additional std asset prov (25bp to 40bp),% bps (inr mn) (inr mn),-2.0 (16) 1,225 672,-2.3 -2.6 (19) (21) 1,838 2,450 666 660,issues on spvs. this has caused the securitisation market to dry up and, as a result, shtf is likely to see much lower off-take for its loans this fiscal year. accordingly, we expect new securitisation as a percentage of disbursements to decline from,impact on credit cost pbt impact pat impact roa impact on roa book value roe impact on roe,bps % % % bps % % bps,44 -9.6 -9.6 3.12 (33) -1.8 18.9 (180),58 -12.2 -12.2 3.03 (42) -2.3 18.4 (230),73 -14.8 -14.8 2.94 (51) -2.8 17.9 (279),45% in fy12 to 22% in fy13. our analysis shows that at this much lower expected level of 6,source: hsbc estimates,shriram transport finance (shtf in) diversified financial services 17 january 2013 however, the impact would be greater if the rbi finalises the revised npl recognition norms from 180 days to 120 days by fy15e and to 90 days by fy16e. in that case, shtf could almost certainly see its reported gross npls jump by around 50- 75% by fy15 and doubling by fy16 from the current 3-3.25% levels. while there should be no immediate impact until fy14e, there will be a one-time negative impact on margins and credit costs over fy15e and fy16e. all these factors combined could have an impact of 2-2.5% on fy14e eps and 9-12 % on fy15e eps. likewise, roa could decline by 30-40bp, and roe by around 175-225bp by fy15e. while we do not expect the economics of the business to be affected, a permanent shift to a 90-day npl,overhang from tpgs potential exit media reports (eg. economic times, business line, mint, business standard) as well as shtf management have indicated that texas pacif