Shriram Transport Finance Company Limited

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Transport Finance Company Limited” from an
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RC Capital Management Shriram Transport Finance Company Limited
Company Analysis: Shriram Transport Finance Company

Limited
About
Shriram transport finance (STF) is in the business of financing the purchase of commercial
vehicles and has been in this business for the last 25 years. The company has focused on the first
time buyer / second hand purchase segment, which has traditionally been neglected by banks
and other financial institutions due to the mobile nature of the clientele and lack of proper
documentation.
STF has built considerable skills and competitive advantage in serving this niche segment and is
now expanding from commercial vehicles (such as trucks) into other areas such as construction
equipment and auto malls (markets to support the second hand sale of vehicles)
Financials
The extent of the company’s competitive advantage is visible from the financials of the company.
The company has consistently maintained a very high ROE of 20-25% in the last 10 years. The
company has been able to deliver this ROE due to a fairly high net interest margin of around 7-
8% with lower leverage than other financial institutions.
In addition, the company has maintained a very high growth rate of 40%+ during this period.
The company has achieved this growth at very low NPA (for an NBFC) of 0.2-1% in the last 10
years. This is commendable considering the high risk nature of the business segment.
Positives
The company has targeted a niche (first time buyers/ second hand purchase) and under-served
segment and built considerable competitive advantage in this segment. The company now has a
wide distribution network of around 500 branches and 16000+ employees.
In addition, the company has built a well know brand and strong customer relationships in this
segment. The company is also cooperating with the unorganized sector (local financiers) and thus
has been able to expand its reach. It will not be easy and profitable for a new entrant to displace
Shriram transport finance from its leadership position in this segment due to the specialized
nature of lending (relationship based and not driven by documentation).
The company has also started expanding into adjoining segments such as construction vehicles.
This should add to the scope of the company’s business and enable it to grow.
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Finally, the company has a long and profitable relationship with PE firms and banks which has
allowed the company to raise equity and debt capital at competitive terms to expand the business
Risks
The key risk faced by the company is slowdown in the economy. A slowdown in the economy
will result in drop in transportation volume and rates which puts a lot of pressure on the small
truck operator. This can cause the loans to turn non performing and thus reduce the profitability
and growth of the company.
In view of the above slow down, the company has already slowed down the loan growth and is
now focusing on maintain the quality of the assets (keep NPAs low)
Management quality checklist
 Management compensation: The management and employee compensation is actually

quite low. The CEO of the company till the recent past was compensated far below
average and now makes less than 1 Cr per annum (including options). This shows the
ability of the company to develop (CEO has been with the company for a long time)
and retain talent in spite of low compensation
 Capital allocation record: The Company has a very good capital allocation record till
date. The company has invested capital in the business at high rates of return and thus
been able to create value for all investors (minority and PE investors)
 Shareholder communication – The annual report of the company provides adequate
disclosure and the management provides quarterly presentations and holds investor
conference after each quarter. The company thus provides timely and good disclosure
about the business performance.
 Accounting practice: Seems conservative and as per norms
 Conflict of interest: None till date
 Performance track record: Above average for the last 10 years. The company has
invested capital at high rates of return. The shareholders have been rewarded very well
due to this high level of value creation
Valuation
I prefer a price to book analysis for financial firms. A DCF based valuation is not helpful as
financial firms typically use the free cash as a raw material to grow business and usually end up
reinvesting most of it.
The company has sold between 1.8 to 3 times book value in the last 5 years. The price to book
prior to that is not as meaningful as the company was a much smaller firm prior to 2006 and hence
was selling at lower valuations.

The company has an ROE of 20%+ and should be able to maintain a 15-20% growth rate in the
future. In view of this, the fair value can be taken as 3-3.5-time book value. At an approximate
book value of 260, the fair value can be taken as 750-800.
Conclusion
STF (Shriram Transport Finance) is a well-managed firm which has been able to develop a
dominant position in a niche segment. The company enjoys substantial competitive advantage
over banks and other financial firms due to the specialized nature of lending to the small transport
operator segment (based on relationships). In addition, the company has developed long term
relationships with investors (Private equity and banks) and local lenders (additional channel)
which will help the company to expand its business profitably in the future.
At the time of starting our position, the company was selling between 450-500 levels and was an
attractive buy at that price. The price has run up since then and as a result I have not added to
your position. The company would be an attractive purchase at a price below 500.

Q1-2013 Report Review

Posted on 9th July 2012
The company has declared the Q4 and annual results. Total income for the company grew by
around 10% to 6022 Crs and net profit grew by around 2% to 1257 Crs.
The profit growth was lower during the year, due to the higher provisioning for non-performing
assets. The economic slowdown in the country has impacted the growth of the business and at
the same time also hurts the quality of the existing loans. The mining ban by Supreme Court and
the slowdown has resulted in the GPAs (gross nonperforming assets) to rise from 2.6% to 3%. The
NPA levels remained almost the same, due to higher write offs/ provisioning of the loan losses
which in turn depressed the profitability.
The company has been able to maintain a high CAR (capital adequacy ratio) of around 24% and
has provisioned for non-performing assets to the tune of 86%. These variables indicate a healthy
balance sheet. In addition, to reduce the future NPA, the company has also raised the LTV (loan
to value) requirements for the new loans.
The company expects to grow at 2 times the GDP growth (15%+) in the subsequent years and
expects to maintain the asset quality. In addition, the company has started new lines of business
– equipment finance via Shriram equipment finance company and Shriram auto mall. The
equipment finance business is now profitable and generated a profit of around 50 Crs during the
year. The auto mall business on the other hand should turn profitable by next year.
The company is performing as expected and should give us decent returns over the long term. If
you have not created a position yet, a price below 515 or below would be a good price to start.


Posted on 7th November 2012
STFC reported a 11% growth in total income for the quarter. The net profit growth was 16% for
the quarter.
One of the important variables – disbursement of funds, grew by 27%. Disbursements is a leading
indicator for income and profit growth and we should be able to get better top line and profit
growth in the coming quarters.
In addition to an improvement in the top line and profits, the company also reported lower NPA
which led to lower provisioning during the quarter. The asset quality seems to have stabilized
and the NPA currently stands at around 0.62%. Hopefully with a slowdown in non-performing
loans, the company can start focusing on building the loan book in the future quarters.
The company has performed as the management indicated in the past quarters (slowdown and
consolidation of the loan book) and should be able to expand the lending if the general economic
growth remains steady or picks up.
The company continues to be a long term holding for the portfolio and I personally think we
should be able to get above average returns in the long term.


Posted on 28th January 2013
STFC reported a 16.2% growth in total income for the quarter. The net profit growth was 19.4%
for the quarter.
One of the important variables – disbursement of funds, grew by 44%. Disbursements are a
leading indicator for income and profit growth and we should be able to get a better top line and
profit growth in the coming quarters. There has been improvement in growth from Q2 to Q3 as
the disbursements have picked up.
The asset quality seems to have stabilized and the NPA stands at around 0.63%. With a slowdown
in non-performing loans, the company has started building the loan book and it is visible in the
growth of the AUM (assets under management) and profits
consolidation of the loan book) and is now started expanding the lending as the general economic
growth has started picking up.
The company continues to be a long term holding for the portfolio and I personally think we
should be able to get an above average returns in the long term


Posted on 26th May 2013
STFC reported a 21.1% growth in total income for the quarter. The net profit growth was 16.6%
for the quarter. The company reported an 11% growth in total income for the year and a net profit
growth of around 9% for the same period.
As I wrote in the earlier analysis, a pickup in the disbursements has resulted in an improvement
in the income growth and profits. The profit growth should improve as the interest rates trend
down (impact of higher interest cost are passed to the customer only with a lag)
The gross NPA continues to be high at around 3.2% and the NPA stands at around 0.77%. The
coverage ratio is around 76% which is within the norms. The CAR (capital adequacy ratio) is at
20.6%. With a slowdown in non-performing loans, the company has started building the loan
book and it is visible in the growth of the AUM (23.5% for the quarter) and profits
consolidation of the loan book) and has now started expanding the lending as the general
economic growth has started picking up.

2013 Annual Report Review

Key risk (identified earlier) and their current status
Risk of NPA – A slowdown in the economy and corresponding impact on the commercial vehicle
segment was expected to have an impact on the asset quality. The gross NPA have risen from 693
to 1025 Crs (a 47% rise). Net NPA have risen from 97 Crs to 241 Crs (a 150% rise). In terms of
percentages, net NPA has risen from .44% to .77% which is not an alarming number in itself.
The above increase was expected as the management indicated it in their earlier communication
and the company slowed down its lending in 2012 and early 2013. The lending is now picking up
as the management seems to be more confident of the asset quality. We will be tracking the NPA
numbers closely over the next few quarters.
Cost to income ratio – The cost to income ratio has dropped a bit and has shown a good trend as
the company benefits from economies of scale. The level of provisions has gone up due to rise in
the NPA. However, this should start dropping as the quality of the assets improve. The net
margins which have improved to around 21% levels should go up further as the ratios improve.
RBI regulation – There have been news items on tightening of regulations for NBFC. Although
there is no new development on this front, a tightening of the CAR or other norms could impact
the profitability of the company
New opportunities
The commercial equipment finance subsidiary which targets first time users is doing extremely
well. The top line grew by 93% and the net profits have increased 51 to 89 Crs. This segment of
the market has a lot of opportunity and STFC has the capabilities to tap this segment. We are
likely to see good performance from this segment in the future.
Changes to fair value
No change as our current estimate of fair value is around 3 times book value which seems
reasonable based on the current growth prospects of the company.

Q1-2014 Annual Report Review

Posted on 9th August 2013
STFC reported a 25.2% growth in total income for the quarter. The net profit growth was 7.1% for
the quarter.
The total assets (loans to customers) which drives the top line grew by 26% y-o-y. The gross NPA
continues to be high at around 3.09% and the NPA stands at around 0.68%. The coverage ratio is
around 78% which is within the norms. The CAR (capital adequacy ratio) is at 20.3%.
Although the numbers for the quarter is good, the company is now facing severe headwinds. RBI
has raised the short term rates to defend the currency and this is likely to impact the funding cost
for the company (around 40% of the borrowing for the company is short term). We can already
see the impact in the current quarter where the interest costs rose by 40%.
In addition to the direct cost issues, the economy is slowing down due to the same reason and
this is likely to put pressure on the top line and NPA of the company. We can see the high stress
on the loan book from a 23% rise in the provisions.
On the plus side, the commercial vehicle lending business is doing very well and reported a 50%
rise in profits.
I personally think that the management is doing a good job in managing the risks and is also
investing in the business during tough times (50+ new branches and around 800 new employees
added). We are likely to see weak performance during the year as the high interest rates start
hurting the business.
The stock price has already reacted to the above issues – though these days you don’t need much
for a stock to drop.


Posted on 31st October 2013
STFC reported a 23.1% growth in total income for the quarter. The net profit fell by 3% for the
quarter.
The total assets (loans to customers) which drives the top line grew by 22% y-o-y. The gross NPA
continues to be high at around 3.27% and the NPA stands at around 0.67%. The coverage ratio is
around 79% which is within the norms. The CAR (capital adequacy ratio) is at 20%.
As we wrote in the previous quarter, the hike in the interest rates by RBI has hurt the company
during the first half of the year. Interest costs rose by around 43% during the first half of the year,
squeezing the net interest income for the company.
In addition to the direct cost issues, the economy has slowed down and this has put pressure on
gross NPA of the company. We can see the high stress on the loan book from a 29% rise in the
provisions.
investing in the business during tough times (80+ new branches and around 2000+ new
employees added). We are likely to see weak performance during the year till the company is
able to pass the higher interest costs to the customers over time.
The long term competitive strengths of the company are intact and the company should do well
in the long run. We will continue to hold the company in the portfolio.


Posted on 23rd February 2014
STFC reported a 22.1% growth in total income for the quarter. The net profit fell by 13.4% for the
quarter.
The total assets (loans to customers) which drives the top line grew by 14.8% y-o-y. The gross
NPA continues to be high at around 3.56% and the NPA stands at around 0.75%. The coverage
ratio is around 79% which is within the norms. The CAR (capital adequacy ratio) is at 22%.
As we wrote in the previous quarter, the hike in the interest rates by RBI has hurt the company.
Interest costs rose by around 41% during the year, squeezing the net interest income for the
company which has grown by 4.4% for the year.
gross NPA of the company. We can see the high stress on the loan book from a huge 44% rise in
the provisions which stand at 30% of the net interest income.
employees added). We are likely to see weak performance during the year till the company is
able to pass the higher interest costs to the customers over time.


STFC reported a 12.9% growth in total income for the quarter. The net profit fell by 17% for the
quarter. The company reported a 14.5% growth in top line and 8% drop in profits for the year
The total assets (loans to customers) which drives the top line grew by 6.3% y-o-y. The gross NPA
continues to be high at around 3.86% and the net NPA stands at around 0.83%. The coverage ratio
is around 79% which is within the norms. The CAR (capital adequacy ratio) is at 23.4%.
As we wrote in the previous quarter, high interest rates have hurt the net margins of the company.
Interest costs rose by around 47% during the year, squeezing the net interest income for the
company which grew by 5.6% for the year.
gross NPA of the company. We can see the high stress on the loan book from the 23% rise in the
provisions which stand at 15% of the income. The is double the 8.5% average for the company in
the last 10 years. The ROE is also at a decade low of 16% as the company continues to focus on
the quality of the loan book and manage the higher levels of NPA.
employees added). The management is optimistic that the second half of 2015 will be better as the
industrial demand revives in the economy.

2014 - Annual Report Review

Key risks and their current status
Risk of NPA – A slowdown in the economy and corresponding impact on the commercial vehicle
segment was expected to have an impact on the asset quality. The gross NPA have risen from
1025 to 1387 Crs (a 35% rise). Net NPA have risen from 241 Crs to 281 Crs (a 16.5% rise). In terms
of percentages, net NPA has risen from .77% to .83% which is not an alarming number in itself.
The above increase was expected as the management indicated it in their earlier communication
and the company slowed down its lending in 2014 to manage the asset quality. The management
expects H2 2015 to be better and expects the lending to improve in the second half. The pressure
on NPA should also reduce once the economy picks up.
Cost to income ratio – The cost to income ratio has remained steady during the year which is a
good sign as the management has been able to control costs in spite of a slowdown in lending. In
addition, the management has continued to invest in expanding the network which will help it
when the cycle turns.
The level of provisions has gone up due to a rise in the NPA and was around 15.4% for the year.
This is an all-time high and indicates the level of pressure on the asset quality. It is good to see
that the management is biting the bullet and taking the required hit to keep the asset quality high
RBI regulation – There have been news items on tightening of regulations for NBFC. Although
there is no new development on this front, a tightening of the CAR or other norms could impact
the profitability of the company
New opportunities
The company is expanding into the commercial vehicle lending, passenger car lending and the
auto mall business. These are new segments and should help the company grow its business in
the future. However, the commercial vehicle business is also cyclical and is likely to face asset
quality issues for some time till the economy turns.
In the long run these new segments should help the company expand its product portfolio, tap
new customers and also build further brand equity in the market (especially through auto malls)
Our current estimate of fair value is around 3 times book value which seems reasonable based on
the current growth prospects and competitive advantage of the company. At a book value of

around 362 per share, that puts the intrinsic value at around 1100 per share and this number
should expand at 15-20% per annum for the foreseeable future.

Q1-2015 - Report Review

Posted on 1st August 2014
STFC reported a 6% growth in total income for the quarter. The net profit fell by 10% for the
quarter.
As I wrote in the previous quarter, high interest rates have hurt the net margins of the company.
Interest costs rose by around 13.4% during the quarter, squeezing the net interest income for the
company which grew by 7% for the quarter.
gross NPA of the company. We can see the high stress on the loan book from the 20% rise in the
provisions which stand at 16.3% of the income. The is double the 8.5% average for the company
in the last 10 years. The ROE is also at a decade low of 14.6% as the company continues to focus
on the quality of the loan book and manage the higher levels of NPA.
investing in the business during tough times (12 new branches and around 1100+ new employees
added in the quarter). The management is optimistic that the second half of 2015 will be better as
the industrial demand revives in the economy.
The numbers continue to look horrible and are at a decade lows. At the same time the long term
competitive strengths of the company are intact and the company should do well in the long run.
We will continue to hold the company in the portfolio.


Posted on 25th October 2014
quarter.
is around 79% which is within the norms. The CAR (capital adequacy ratio) is at 22%.
As I wrote in the previous quarter, high interest rates have hurt the net margins of the company.
Interest costs rose by around 11% during the quarter, impacting the net interest income for the
company which grew by 11.5% for the quarter. The net interest income has improved from the
previous quarter as the interest rate pressures have started stabilizing and could reduce as
inflation comes down and the economy improves.
In addition to the interest rate issues, the slowdown in the economy has put pressure on gross
NPA of the company. We can see the high stress on the loan book from the 20% rise in the
provisions which stands at 14.6% of the income. This is double the 8.5% average for the company
in the last 10 years, though the numbers have now started to trend down. The management
believes that the level of NPA has peaked and it should start trending down as the industrial and
mining activity starts to pick up.
The ROE is also at a decade low of 14.6% as the company continues to focus on the quality of the
loan book and manage the higher levels of NPA.
One additional factor impacting the performance is the poor results of the equipment finance
subsidiary which has seen a 68% drop in profits due to near doubling of bad debt provisions. The
drop in profits of the subsidiary has impacted the consolidated numbers by around 4.5%.
investing in the business during tough times (46 new branches in the first half of the year). The
management is optimistic that the second half of 2015 will be better as the industrial demand
revives in the economy.
The numbers continue to look horrible and are at a decade lows. At the same time the long term
competitive strengths of the company are intact and the company should do well in the long run.
We will continue to hold the company in the portfolio.


Posted on 30th January 2015
quarter.
continues to be high at around 3.5% and the net NPA stands at around 0.75% (both have dropped
a bit from the previous quarter). The coverage ratio is around 79% which is within the norms. The
CAR (capital adequacy ratio) is at 22%.
As I wrote in the previous quarter, high interest rates have hurt the net interest margins of the
company. However, with a downward trend in interest cost, the headwind should now turn into
a tailwind. We are already seeing evidence of that in the current quarter. Interest costs rose by
around 8.8% during the quarter, whereas the interest income was up by around 10.5% due to
which net interest income grew by 12.5%. We could see this improve further if the current trends
continue.
In addition to the interest rate issues, the slowdown in the economy has put pressure on gross
NPA of the company. We can see the high stress on the loan book from the 16% rise in the
provisions which stands at 15.2% of the income. This is double the 8.5% average for the company
in the last 10 years, though the numbers have now started to trend down. The management
believes that the level of NPA has peaked and it should start trending down as the industrial and
mining activity starts to pick up.
One additional factor impacting the performance is the poor results of the equipment finance
subsidiary which has seen a 66% drop in profits due to near doubling of bad debt provisions. The
drop in profits of the subsidiary has impacted the consolidated numbers by around 4.5%.
investing in the business during tough times (65 new branches during the year). The management
is optimistic that the coming quarters will be better as the industrial demand revives in the
economy.
The numbers continue to look horrible and are at a decade lows, though there are small
improvements happening now. At the same time the long term competitive strengths of the
company are intact and the company should do well in the long run. We will continue to hold
the company in the portfolio.


The latest result was a surprise for me and the markets too. The stock has been punished as
markets don’t like such rude surprises. Although the drop in profits (due to the huge loss in the
equipment leasing business) was a clear case of management failure, I have reasons to believe
that the core strengths of the business remain intact and this fiasco will get fixed in time with
appropriate lessons being learnt by the management.
Let’s look at the numbers in two parts – standalone which is the main vehicles business and the
Shriram equipment finance business which has caused all the grief in the current quarter.
STFC reported a 15.2% growth in total income for the quarter. The net profit rose by 7.4% for the
quarter.
As I wrote in the previous quarter, high interest rates have hurt the net interest margins of the
company. However, with a downward trend in interest costs, the headwind should now turn into
a tailwind. We see further evidence of that in the current quarter. Interest costs rose by around
18.7% during the quarter, whereas the interest income was up by around 29.8% due to which net
interest income grew by 17.9%. We could see this sustain if the current trend continues.
The slowdown in the economy has put pressure on gross NPA of the company. We can see the
high stress on the loan book from the 29.7% rise in the provisions which stands at around 16% of
the income. This is double the 8.5% average for the company in the last 10 years, though the
numbers have now started to trend down. The management believes that the level of NPA has
peaked and it should start trending down as the industrial and mining activity starts to pick up.
In summary, the vehicle finance business has started improving and should deliver decent
numbers in 2016. In addition, this, the management has focused on improving the competitive
strength by expanding the distribution network which now stands at 741 branches (against 654
branches in 2014). This is all the more commendable as the manpower levels have been reduced
by 10% during the year, even as the network was expanded. The business has thus become more
efficient, though the numbers do not show the same yet.

The fiasco
The company reported a 231 Crs loss in the equipment finance business which almost wiped out
the entire quarter profit from the other businesses. The magnitude of the loss is such that the net
worth of the subsidiary has been wiped out (STFC is infusing 100 Crs into the subsidiary now),
which means that the equipment leasing business has not only wiped out all the profits till date,
but even the entire invested capital
This loss is however technical in nature and does not represent a complete loss. Around 400 Crs
of the loan book moved from the 150+ days past due bucket to 180+ days past due (loans not
being paid timely), due to which the company had to take a provision of 60% against these loans
(set aside money to cover losses). In the conference call, the management has indicated that they
are now planning to use the parent company’ personnel (Shriram transport) to work with the
equipment leasing subsidiary to resolve these 150+ and 180+ overdue loans and believe strongly
that most of these loans are recoverable and the eventual losses will be much lower than the
provisions
The bad news, however does not end here. There is another 400 Crs of the loan book which will
move to the 180+ days past due bucket in the next two quarters. This may cause another round
of large provisioning and a hit to the bottom line.
I heard the conference call, where the management answered several questions on the
performance of the equipment leasing business. If you read between the lines, I think this is what
the management is saying – Our equipment subsidiary has screwed up royally. They were
lending money with no idea of the risks and have ended up with a loan book with almost 30%
bad debt. We did not realize the extent of the problem till this quarter when almost 15% of the
loan book hit the 180+ days overdue and had to be provisioned for. We are now getting involved
to clean up the mess.
It is quite clear that the senior management clearly misread the dynamics of the equipment
leasing market (by assuming it to be similar to the CV market) and continued to believe the
numbers being provided by the subsidiary, till finally the reality hit them in face in the current
quarter.
In spite of the above fiasco, I still believe in the company and the management for the following
reasons
 The core strength of the business – wide distribution network, risk management process
in their CV lending business and brand name remains intact.
 The above fiasco is an honest business mistake which the management has realized and
have provisioned for it completely, without trying to hide the mistake to report a good
quarterly number. This is generally not true for a lot of finance companies and banks
which try to hide their problems for a long time.

 The management plans to relook at the equipment finance business closely, which
basically means they will shrink the asset book and lend very selectively. The
management has however clearly slipped by allowing the subsidiary to run in such a
reckless fashion
 The core business of STFC is improving gradually with the level of NPA and GPA
stabilizing and the numbers should trend up in the coming quarters.
I personally think that these problems will take 2-3 quarters to sort out. It is a mistake, but an
honest one and does not involve any maliciousness on part of the management. The short term
reaction of the market has provided an opportunity to us and I plan to increase the position size
in the model portfolio.

2015 – Annual Report Review

I would encourage you to read the Q42015 results review as it details the fiasco, the company had
in the last quarter, which gave us a short window to add to our position.
The company reported a 231 Cr loss in the equipment finance business, which wiped out the net
worth of the subsidiary. As a result of this loss, the company reported a 9 % drop in profits for
the year. The company reported an 11.3% net margin and around 14% ROE for the year, both of
which are the lowest in the last 15 years
Risk of NPA – Slowdown in the economy and the fiasco in the equipment finance division has
resulted in a gross NPA of 1894 Crs which is an increase of 30% and stands at 3.8% of assets. This
is also a 10 year high and shows the level of stress on the books. The high NPA has driven the
provision to almost 17% of sales (another all-time high) which has put stress on the margins of
the company.
The rise in the NPA has not been a surprise due to the slowdown in the economy and other factors
acting as a headwind to the transportation segment.
A drop in the fuel prices, reducing interest rates and general improvement in business climate
has improved the situation and it is likely that the NPA and provisions should reduce going
forward.
Cost to income ratio – The cost to income ratio has remained steady during the year which is a
good sign as the management has been able to control costs in spite of a slowdown in lending. In
addition, the management has continued to invest in expanding the network which will help
when the cycle turns.
The company opened close to 90 branches and 18 auto malls during the year. However, at the
same time, the company has reduced the manpower by 10% by making the back office operations
more efficient. This should help the profitability of the company in the future.
Another surprise?
The company has gone ahead and merged the equipment finance subsidiary with itself.
Irrespective of the reasoning and motivation behind this move, the fact is that the management
lost control of this subsidiary which has come back to bite the company. The merger should
ensure that the management will look at the equipment financing segment as closely as the CV
lending business and manage the risks in a prudent fashion

I think the chances of a new surprise are lower, but then in the finance business, surprises are
usually negative. The impact of the NPA in the equipment finance segment will continue for one
or two more quarters and that could hit the profitability in the short term.
As I wrote in the quarterly update, I don’t think the competitive strength has been impacted and
the company should do well in the long run.
New opportunities
The company is expanding into the commercial vehicle & passenger car lending and the auto
mall business. It is quite likely that the company will go slow in the equipment leasing business
for some time till they sort out the NPA and put better controls in place.
In the long run these new segments should help the company expand its product portfolio, tap
new customers and build brand equity in the market (especially through auto malls)
Another point to note is that company earned around 46 Rs a share in the current year. If we take
the long term net margins of around 17-18% into account, the eps would have been around 72
per share. The fair value estimate above gives us a PE of around 17 times which does not seem to
be excessive (it was around 11 times when the stock dropped below 800).


Posted on 23rd August 2015
The company reported only the standalone business numbers during the quarter. They have
given a lame excuse that as the construction equipment business is being merged, they will start
reporting the numbers from Q4 when the merger is complete.
This is a completely silly reason for not reporting numbers and to make the numbers appear
better than they actually are. Anyway, I have written extensively about how the management has
handled the whole episode in the previous two notes and I will not waste anymore virtual ink on
it.
Let’s look at the numbers in two parts – standalone which is the main vehicles business and the
Shriram equipment finance business where we can roughly estimate what is happening
STFC reported a 16.7% growth in total income for the quarter. The net profit rose by 4.8% for the
quarter.
NPA continues to be high at around 4.07% and the net NPA stands at around 0.9%. The coverage
ratio is around 78.6% which is within the norms. The CAR (capital adequacy ratio) is at 20.1%.
The company is now seeing a pickup in demand as can be seen from the double digit growth in
top line. In addition, the drop in fuel prices has reduced the cash flow pressures for the customers
which should reduce the increase in NPA going forward. If the economy improves by the second
half of the year (management’s expectations, not mine – I have no views on it), then the NPA
should come down further
The downward trend in interest costs should help the company grow its net interest income at a
faster rate.
In summary, the vehicle finance business continues to improve and should deliver decent
numbers in 2016. In addition, this, the management has focused on improving the competitive
strength by expanding the distribution network which now stands at 770 branches. This is all the
more commendable as the manpower levels have been reduced further, even as the network was
expanded. The business has thus become more efficient, though the numbers do not show the
same yet.
Equipment finance business
The company has not disclosed the numbers, but in the conference call mentioned that the GNPA
have risen to around 1000 Crs from the 800 Cr number in the previous quarter. If we take a similar
provision ratio, it is quite likely that the company would have made a similar provision as Q4 for

the equipment finance business. In effect, the company would have delivered a minimal profit at
the consolidated level.
The management is now focused on driving collections and shared that they have been collecting
around 100 Cr+ per month. This should improve further in the coming quarters if the economy
picks up.
We should see better numbers in the coming quarter and hopefully the stock price will respond
to the improvement in fundamentals.


Posted on 3rd November 2015
The company reported only the standalone business numbers during the quarter. We will have
the consolidated numbers available by the end of the year. At the same time, as the company has
halted equipment leasing, it is easy to infer the consolidated numbers, which I will do at the end
of the note.
STFC reported a 15% growth in total income for the quarter. The net profit rose by 11.9% for the
quarter. The same numbers for the first half were around 15.8% and 8.3%.
NPA continues to be high at around 4.18% and the net NPA stands at around 0.93%. The coverage
ratio is around 78.5% which is within the norms. The CAR (capital adequacy ratio) is at 19.2%.
top line. In addition, the drop in fuel prices has reduced the cash flow pressures for the customers
which should moderate the increase in NPA going forward. If the economy improves by the
second half of the year (management’s expectations), then the NPAs should come down.
numbers in 2016. In addition, the management has focused on improving the competitive
strength by expanding the distribution network which now stands at 800 branches. The company
has started increasing the manpower as they are now seeing demand come back slowly.
A few of my impressions/ conclusion
 The company continues to have a high NPA of around 503 Crs which is roughly around
6 months of provisions at current rates. We may see further rise in the gross NPA as the
company moves from 180 days overdue to 150 days overdue. Although the reported NPA
number is expected to be impacted by 1-1.5% of asset, I think this is more of an accounting
than an economic change.
 The current provisioning expenses are running at almost 16% of top line which is
considerably above the average. As the economy improves, I expect to see this number
normalize and this should help the company report a higher net profit.
 The long term competitive threat from the new banks is likely to be low as lending to used
CV market is a very specialized and risky activity. Even Shriram transport after 15+ years
of experience, got their head handed to them, when they ventured out in the equipment
finance space. The risk adjusted returns for new and existing banks are likely to be low in
this space and hence the risk of competitive threat will not change

The company has not disclosed the numbers, but in the conference call it was mentioned that the
GNPA is around 1100 Crs. The management is now focused on driving collections and shared
that they have been collecting around 100 Cr+ per month. This ties with the gross AUM in this
business of around 2500 Crs, which is a reduction of around 500+ Crs in the last 6 months.
We should expect a further drop in the AUM to around 2000 Crs by end of the year. I expect an
additional provision of around 250-300 Crs by Q4 of the current year. It is quite likely that
although the top line numbers and various indicators will continue to improve for the rest of the
year, the reported numbers for the second half could be impacted by these provisions.
We are likely to see better performance from FY17 once the past problems are cleaned up and the
fixes done in the last 1-2 years start bearing fruit.
Consider one more point – Equipment finance has a bad debt of around 1100 Crs. Let’s assume
the worst possible scenario that the company losses all this money and has zero recovery (very
unlikely). In such a scenario, shareholders have lost around 45 Rs per share of value. This is the
equivalent of one of us losing our wallet because we had a hole in the pocket. Does that change
what we will earn over the course of our lifetime?
How much did the stock price drop after the news of this loss – 300 Rs per share or almost 7 times
the max possible loss from this fiasco …so much for efficient markets!


Posted on 2nd February 2016
The company reported only the standalone business numbers during the quarter. We will have
the consolidated numbers available by the end of the year. At the same time, management has
shared some details of the equipment finance business which I will discuss later in the note.
STFC reported a 15.6% growth in total income for the quarter. Net profit rose by 20.1% for the
quarter. The same numbers for the year were around 15.7% and 12.3%. ROE was around 14.2 %
during the quarter, which is generally the threshold beyond which a financial services company
can get an above average valuation.
The AUM which drives the top line grew by 16.6% y-o-y. The gross NPA continues to be high at
around 4.29% and the net NPA stands at around 0.88%. The coverage ratio is around 80.2% which
is within the norms. The CAR (capital adequacy ratio) is at 18.5%.
top line. In addition, the drop in fuel prices has reduced the cash flow pressures on the customers
which should moderate the increase in NPA going forward.
numbers in 2016. In addition, the management has focused on improving the competitive
strength by expanding the distribution network which now stands at 822 branches. The company
has started increasing the manpower as they are now seeing demand come back slowly.
The company has not disclosed the numbers, but in the conference call it was mentioned that the
GNPA is around 1000 Crs (drop of 100 Crs from last quarter). The management is now focused
on driving collections and shared that they have been collecting around 100 Cr+ per month. The
management is focused on dropping the NPLs to around 800 Crs by the end of the year.
A revival in the infrastructure projects at the ground level, is now leading to better equipment
utilization and the management is now hopeful of lower delinquencies and better performance
from the business in the future periods.

NPA and provisions
There are a lot of moving parts in the next quarter.
For starters, as per the RBI mandate the company needs to consider any loan which is past due
beyond 150 days, as an NPA. As a result, the management expects an increase in the GNPA from
4.2% to around 5.5-5.8% by the end of the year.
In addition to the above, the equipment finance book is likely to have NPL of around 800 Crs
which means that the company will have a consolidated GNPA of at least 6% or higher.
This spike in NPA could mean that the company will have to provide much higher provisions.
However, at the same time, the RBI regulations demand a provision of around 15% for loans
beyond 150 days. The company has usually provisioned up to 80% of NPA and hence they are
fairly overprovisioned from a regulatory perspective.
In view of the above, management has indicated that they may drop the provision ratio
depending on how the quarter develops and after getting approvals from the board on it.
If the above sounds too technical, then it really is so. The quality of the book has not changed due
to the change in the recognition norms of RBI, even though it impacts the P&L statement. The
only reason why profits get impacted is because the company is now recognizing the overdue
debt much earlier.
I do not consider the above to impact the underlying performance of the company as the target
customer of STFC is the unbanked entrepreneur and has a fairly volatile cash flow. As a result,
an asset can easily slip into an NPA even though the loan will not go bad as the customer will
pay in future periods. This is quite similar to the NPAs we see in the case of Repco home finance.
It is likely that the NPA and provision numbers could bounce around in the next 1-2 quarters
depending on the accounting and thus impact the profit. However, based on the current trends,
it still appears that the business performance of the company is improving.


As I shared in the past updates, the company has not been reporting the equipment finance
numbers, which have been a mess for the last one year and hence the reported numbers were
standalone in nature.
In the current quarter the consolidated numbers have been reported and we have a full view of
the company’s performance. As the management noted in the previous quarter, the lending
income is now picking up due to improvement in CV sales. As a result, the total income grew by
26% for the quarter and 18.5% for the year.
The net profit on the other hand dropped by 55% during the quarter and 5% for the year. I will
explain the reason for the drop later in the note.
The AUM growth has been around 23% for the quarter and the year. This parameter is a lead
factor for top line and profit growth and seems to have recovered for now. The ROE for the year
was around 12% which is an all-time low for the company. The CAR ratio stands at around 17.6%
which means that at the current rate of growth, the company will have to raise equity capital in
the next 2-3 years, which is not a bad thing if the company can do so at good valuations.
The movement on NPA
As I noted in the previous quarter, there are several technical changes which have occurred in the
last one year. The first one is the recognition norms which has now become more stringent from
180 days overdue to 150 days overdue. So any loan overdue by 150 days needs to called an NPA
and provisioned for. The net result is that the Gross NPA has increased by around .7% due to this
change. This is likely to increase further for the next two years as the norms becomes stricter to
120 and then 90 days overdue.
The above change though technical, does have an impact on the performance to a small extent as
the credit cost/ provisioning for the company will go up by around 0.3-0.5%.
The second change, though one time, was the merger of the equipment finance business into the
parent company. As a result, around 890 Crs of NPA have been added. As I have noted in the
past, the Equipment finance business disaster has been a management failure. The division has
now shrunk its loan book from 3000 to around 1650 Crs and has taken close to 400 Crs+ of
provision. The management expects recoveries to continue as the demand in the infra space seems
to be picking up
The management now plans to be cautious in expanding the loan book in this segment.

Finally, the management has dropped the provision ratio to around 70% (will not be giving an
accounting lesson on this point here). The net result of all these changes is that the GNPA ratio is
now 6.1% and NPA is at 1.99%. My guess is that the GNPA ratio seems to have peaked and should
decline further.
The net result of this elevated NPA is that the cost of provisions has jumped from an average of
9% to close to 20% of sales in the current year. This has suppressed the profit and ROE for the
year. My guess is that the provision levels should drop from here and we could see an
improvement in the profitability (which is partly discounted for now)
FY17 and beyond
The management sounded quite optimistic in terms of the ongoing improvements in demand at
the ground level in the conference call. They have indicated a 15% growth for now, which should
improve to 20% (my guess) if the monsoon is normal.
If the infra space and rural economy recovers, we should see an improvement in the NPA and
hence a better profit growth in the coming quarters. The stock price will improve if we see a better
performance from the company.

2016 – Annual Report Review

Posted on 2nd July 2016
The company hit a 10 year low, in terms of ROE and margins in 2016. Although some of it was
due to the economy, but a substantial part was due to management mis-steps around weaker
lending and the whole fiasco around the equipment finance division.
Risk of NPA – Slowdown in the economy and fiasco in the equipment finance division has
resulted in a gross NPA of 3870 Crs which is an increase of 104% and stands at 6.2% of assets.
This is also a 15 year high and shows the level of stress on the books. The high NPA has driven
the provisions to almost 20% of sales (another all-time high) which has put stress on the margins
of the company.
A drop in the fuel prices, reducing interest rates and general improvement in business climate
has improved the situation and it is likely that the NPA and provisions could reduce going
forward. We need to track this short term risk closely for now
The small bank and fintech risk – The NPA levels and slowdown in the economy has dominated
the discussion about the company. However, I think this risk is overblown and will dissipate over
time. The more important long term risk are the changes in the financial sector from a regulatory
and technology standpoint.
RBI has started issuing banking licenses for new types of entities and the small bank entities are
the closest in terms of business model to NBFCs like Shriram transport. These banks are similar
to a regular bank in terms of operations (borrowing and lending) except that 50% of their loans
need to be less than 25 lacs and 75% of the total lending must be from the priority sector.
Several MFI have converted into a small bank and these entities can now borrow and lend at
lower rates in the priority sector such as commercial vehicle lending.
The key competitive advantages for Shriram transport has been the wide distribution network,
relationships with small operators in the CV space and the capability to value the assets and credit
worthiness of the unbanked borrower. A few of these advantages such as being able to assess the
credit worthiness of the borrower is like to reduce as the financial inclusion increases and
technology is used to build the credit profile of a lot unbanked people (The JAM trinity)
The company should be able to leverage the same technology and increase its reach. At the same
time, the distribution reach and its key skills in the used CV lending are not easy to duplicate
even with the new technologies.

We need to keep an eye on the rapid regulatory and technology changes in the financial services
space and see how the company adapts it.
New opportunities
The company is expanding into the commercial vehicle, passenger car lending and the auto mall
business. It is quite likely that the company will go slow in the equipment leasing business for
some time till they sort out the NPAs and put better controls in place.
As I was writing this note, I came across this news item
http://timesofindia.indiatimes.com/business/india-business/Piramal-rejigs-Shriram-Group-
brass/articleshow/52930788.cms
There are two points which stood out
 The current CEO, Umesh Revankar has been replaced by J S Gujaral. My guess is that the
whole fiasco around the equipment finance business and overall poor performance in the
last 3-4 years is responsible for this change.
 Ajay Piramal, who is chairman of the Shriram group is now taking a more active role in
setting the strategic direction of the company and having the right people in key positions
to take advantages of the changes in the financial services space.
The above note gives me confidence that Mr Piramal with the new management team should be
able to improve the overall performance of the company in the long run.
Another point to note is that company earned around 52.3 Rs a share in the current year. If we
take the long term net margins of around 17-18% into account, the eps would have been around
80 per share. The fair value estimate above gives us a PE of around 17 times which does not seem
to be excessive.
The stock dropped to around 750-800 levels last year when the company reported the huge losses
in the equipment finance division. I was unhappy with the development, but realized that this
was not a fatal mistake and the competitive advantage of the company was still intact.

We increased the position size, but in hindsight should have done by more. Although this
situation bears similarity to IPCA labs, there is one key difference. Both the companies were hit
by a onetime problem which has not hurt the long term competitiveness of these companies. The
management for both the companies have acknowledged the issue and are working on fixing it.
However, in case of IPCA, unlike Shriram transport, the final resolution is in the hands of the
FDA which is an external entity over which the company has no influence. As a result, the
turnaround for IPCA has taken much longer than Shriram transport.
I hope some of you, were able to take advantage of this temporary problem and build a position
in the company. My own transactions mirrored those of the model portfolio (as they usually do).

Q1-2017 –Report Review

Posted on 2nd August 2016
We bought this stock for the first time in late 2011, early 2012 when the entire CV market was in
a downward spiral. We have held the stock since then and added partly to the position last year.
During this 4+ year period, the industry and the company has gone through one of the worst
phases of performance.
The CV market collapsed due to a drop in demand for industrial and mining goods. The rural
economy collapsed due to poor monsoons and a reduction in the subsidies by the Modi
government which led to further reduction in demand for CV and rise in the NPA. If this was
not enough, the company managed to shoot itself in the foot in 2015 (read the Q4 2015 note on
this).
So if one had a complete view of the future in 2011 and had foreseen all these events, the best
course of action would have been to avoid the stock. However, the surprising part is that the
position has still delivered around 30% CAGR (weighted by time of purchase and including
dividends) over the last 4+ years.
There are of course other companies which have done much better, but it would not be a fair
comparison, as those companies executed flawlessly whereas the STFC management performed
quite poorly in comparison. The only reason why we have done well in spite of all these issues is
the strength and quality of the company’s franchise (not because of the timing of our purchase or
my brilliance)
This position has been instructive in terms of how a company with a strong competitive position
can withstand a bad market and poor management. As I wrote in Q42015, the equipment finance
business fiasco was not a long term disaster for the company and the market reaction to the price
was excessive. If the underlying franchise is strong, the business can withstand a few mis-steps
of the management.
Before I discuss about the quarterly results, let me point some encouraging developments
 Ajay Piramal has taken over as chairman of the group and now is driving the strategy of
the group. STFC has not moved fast enough in terms of innovations in the business in the
last few years. We can expect to see some action on this front over the next few years.
 A new CEO has taken charge and hopefully with the existing management team will not
allow the equipment finance type debacle to repeat again.
 The overall macroeconomic environment is improving and the company is now seeing
better collections, though this has yet to translate into the reported NPA numbers (more
on that later)

 The total income grew by 14.1% for the quarter and PAT grew by 16.5% during the same
period.
The AUM growth has been around 23% for the quarter. This parameter is a lead factor for top
line and profit growth and is doing well. The ROE was around 14.5 % which is an improvement
from the decade low of 12% in the previous year. The CAR ratio stands at around 17.4% which
means that at the current rate of growth, the company will have to raise equity capital in the next
2-3 years, which is not a bad thing if the company can do so at good valuations.
The movement of NPA
I have written a lot on the NPA in the previous updates, which I will not repeat here again. Let
me go over the key points
Gross NPA grew around 6% q-o-q and are now at 4125 Crs or 6.4% of the asset base. Net NPA
grew by the same amount and are at 1.97% of the AUM.
The reported NPA continues to rise due to several reasons. For starters, RBI has now mandated
that the NPA reporting norms for NBFC is now at 150 days past due from 180 days in the previous
year. If we remove this accounting change, the rise is around .6% on a year on year basis. The
second reason is that the economic conditions have just started improving and reduction will be
seen only after the monsoon (which is good for now) as vehicles are put into service and the
borrowers are able to see a better cash flow.
The company is reporting quite a good performance in the equipment finance division. They have
shrunk the loan book from 3000+ Crs to 1400 Crs in the current quarter. In addition, the
management has indicated that the collections rate has improved from 100+ Crs to around 200
Crs and this should continue after the monsoon as the infra space picks up. As a result, the
management expects the eventual write offs to be much lower than the 900cr + NPA on the books.
The actual write offs till date have been below 100 Crs and this matches with the long term credit
cost of around 2.5%.
We could see a positive surprise on the provisions from the equipment finance division if the
current performance continues
FY17 and beyond
The infra and mining segment seems to be picking up and the normal monsoon is likely to
improve the rural economy. The management sounded quite optimistic in terms of the ongoing
improvements in demand at the ground level in the conference call. They have indicated a 15%
growth for now, which appears to be cautious as the AUM has been growing at 20%+ for the last
two quarters and could continue at this level

The management believes that the NPAs have peaked and should reduce in the future in spite of
the tightening of the norms to 120 days from the current 150 days.
I am more excited about the fact that the top management is now being driven by Ajay Piramal
and we could see positive changes to the company’s long term direction under his leadership.

Shriram Transport Finance Company Limited

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RC Capital Management is an Investment

Advisory Firm specializing in identifying and

This report is a compilation of our analysis of

The report is meant for subscribers of RC Capital

RC Capital Management is a SEBI Registered Investment Advisor

Company Analysis: Shriram Transport Finance Company

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Management quality checklist

 Management compensation: The management and employee compensation is actually

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Q1-2013 Report Review

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Q2-2013 Report Review

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Q3-2013 Report Review

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Q4-2013 Report Review

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2013 Annual Report Review

Key risk (identified earlier) and their current status

Changes to fair value

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Q1-2014 Annual Report Review

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Q2-2014 Annual Report Review

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Q3-2014 Annual Report Review

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Q4-2014 Annual Report Review

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2014 - Annual Report Review

Key risks and their current status

Changes to fair value

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Q1-2015 - Report Review

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Q2-2015 - Report Review

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Q3-2015 - Report Review

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Q4-2015 - Report Review

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2015 – Annual Report Review

Key risks and their current status

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Changes to fair value

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Q1-2016 Report Review

Equipment finance business

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Q2-2016 Report Review

A few of my impressions/ conclusion

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Equipment finance business

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Q3-2016 Report Review

Equipment finance business

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NPA and provisions