Stock Update: Shriram Transport (STFC) - Piramal plans to take a bite

Ajay Piramal (Piramal Group) is in advanced talks to buy US private equity firm TPG Capital's 20.27% stake in STFC, for around Rs 3,500 crs. Piramal is holding a lot of cash from his sale of his formulations business to Abott, and STFC stake gives him a foothold into one of the best financial intermediaries in India (in my opinion!).

Ajay Piramal is well-known for his business acumen and has a lot of followers in the value investing community. Hopefully, with this stake, there will be some focus on STFC. With the new roll out of auto malls, growth in the LCV and mini CV segments, STFC is likely to do fairly well. If CV financing picks up (a couple of years down the line), the profits would soar. The main reason I like STFC is that they have a very strong moat in their core business, which results in NIMs of 7-8% (double that of the best run banks like HDFC Bank).

With possibiliities of reduced interest rates in 2013, it may be a harbinger of good tidings for STFC.

Happy New Year & Happy Investing in 2013.

Results Update - Shriram Transport Finance

Good set of numbers from STFC. Profit growth has been better than my expectation. But continuous rise in interest rates is surely going to have a more serious impact in the coming quarters.

	Q1 2010	Q1 2011	% Growth
Sales	1233.51	1393.22	12.95%
Op Profit	948.29	1039.49	9.62%
Net Profit	288.94	347.3	20.20%
EPS	12.76	15.34	20.22%

Shriram Transport Finance Complay Ltd (STFC) - RBI Policy Update

RBI's monetary policy announced on May 3rd had created a lot of confusion on whether STFC's securitized assets would continue to be treated as priority sector loans. (Read the probable impact of it here)

On RBI's policy statement on July 1, 2011, it has clarified that investments made by banks in securitized assets that are originated by banks or other eligible financial institutions shall continue to be classified as priority sector.

This means that any bank's investments in securitized assets will be eligible  for classification under priority sector  only if it was eligible to be classified as priority sector advances before their securitization.

So, for STFC, this is good news, as their cost of borrowing is unlikely to go up.

However, the underlying concern of slowing of growth is still there. So, although the stock may not go below 600, it may be difficult for it to gallop away beyond the 720-750 range in the near future.

Monetary Policy Impact on Shriram Transport Finance Complay Ltd (STFC)

This monetary policy announced on May 3rd has a new guideline whereby all loans by banks to NBFCs will now NOT be considered under priority sector lending (PSL). This has impacted the stock price of Shriram Transport Finance Complay Ltd (STFC) greatly. The stock has been hammered down by nearly 25% in the last few days. 
Let us quickly look at the facts:-

• 20% of the companies funds come from banks. The rest is from retail and institutional borrowing.
• The company foresees a slowdown in CV (commercial vehicle) sales in the next 3-6 months as interest rates rise.
• Since the company primarily lends to used CV owners (70% of the loans are for used vehicles), there is a lag when the slowdown would impact the company. 
• It is possible that the slowdown may hit in the next financial year and the company may grow at 10% instead of the 15%-20% it hopes to do now.
• The company does not expect any significant impact on NIMs after the monetary policy
• FY12 Q1 results would need to be keenly watched for possible future direction of the company.
• The stock may not breach the 52 week low of about 530. I would be really surprised to see it go down much below 600.

Even if I assume a slowdown and a 10% growth for FY12, the expected FY12 EPS would be about Rs. 60. The expected price at an approximate PE band of 12-14 would result in an approximate price of 720-840.

I think STFC may be providing a good risk-reward situation for long term investors.