Smoother road ahead

The situation
Shriram Transport Finance Company (STFC) is one of the largest non-banking finance companies (NBFCs) in India which finance commercial vehicles. The company specialises in financing second-hand commercial vehicles, wherein it has created a niche segment and has capitalised on the absence of formal financing solutions.

The fourth quarter of FY15 was a drag on STFC's results. Shriram Equipment Finance Company Limited (SEFCL), a subsidiary of STFC, reported a net loss of ₹237.13 crore as a result of higher provisioning for NPAs. The assets under management declined by 12 per cent from ₹3,418 crore in Q4 FY14 to ₹2,999 crore in Q4 FY15. The company has also faced a slow pace of growth in financing opportunities due to a slowdown in the commercial-vehicle market.

What's changed?
As per Umesh Revankar, Managing Director of STFC, the segment is witnessing active uptake in the heavy-new-vehicle and used-CV space. The re-sale value of vehicles is looking better and the demand is quite good in many states. Vehicle-utilisation levels are gradually going up.

Triggers

• As per Crisil, the outlook for the commercial-vehicle industry is improving and the cash flows of transport operators are likely to pick up, thus benefiting STFC.
• With Crisil upgrade, the cost of borrowing for the company may fall. For FY15 it was at 10.9 per cent. STFC may further improve its margin with an easing monetary policy as well.
• STFC has recently planned to merge SEFCL with itself. The decision has been taken as part of restructuring to have better focus, better administrative control and a common process.

What lies ahead?
The commercial-vehicle industry is cyclical in nature. It has already seen its worst phase. With its revival, STFC stands to gain. With good monsoons the demand for used CVs is likely to pick up, even in light commercial vehicles.

Valuations
STFC is currently trading at a price-to-book multiple of 2.20, which is a 15 per cent discount to its five-year average of 2.59. Buy.