2011

COMPANY RESEARCH REPORT October 28, 2010

COMPANY RESEARCH REPORT

INITIATING COVERAGE

SHRIRAM TRANSPORT FINANCE COMPANY LIMITED

RECOMMENDATION: BUY CMP: Rs. 647 TARGET: Rs. 751-756 HOLDING PERIOD: 1-1.5 Years RISK PROFILE: AGGRESSIVE

INITIATING COVERAGE- BUY : SHRIRAM TRANSPORT FINANCE COMPANY LTD.

Business Summary
Shriram Transport Finance Company (STFC) is a deposit taking NBFC primarily involved in the financing of 2nd hand and new Commercial Vehicles. It enjoys the distinction of being Indias largest Asset Financing NBFC with a market share of 25% in the pre-owned CV (Commercial Vehicle) financing segment and a market share of 8% in the new CV financing segment.

NSE Code: SRTRANSFIN BSE Code: 511218 ISIN Code: INE721A01013 Reuters Code: SRTR.BO Bloomberg Code: SHTF IN Website: www.stfc.in Sector: EPS (TTM): PE (TTM): Industry PE: Mkt. Cap (In crores): 52 Wk high: 52 Wk low: P/BV: Beta: Yield (%): Face Value: Debt/Equity: Institutional Holding: NBFC Rs. 54.38 11.9 13.9 14641 cr Rs. 899.9 Rs.562 2.99 0.7 1.0 10 4.09 43.58%

Investment Rationale
STFC possesses a very unique business model and is functioning in an environment where organized competition is low and entry barriers are high. STFC has been able to develop strong competencies in the areas of loan origination, valuation of 2nd hand CVs and collections since it has been involved in this business for over three decades. STFC has a diversified borrowing profile and has reduced its dependence on floating rating liabilities thereby making it less prone to the rising interest rates cycle employed by the RBI. Our SOTP Discounted earnings+ depreciation model for STFC suggests that the fair value of the share is Rs.751. In addition to that if one were to employ a conservative PE multiple of 10, the PE valuation suggests a stock target of Rs.756 based on FY12E eps.

STFC vs Sensex

Risks
STFCs target market (CV owners) is a risky breed due to their limited banking habits, lack of credit history and difficulties in keeping track of the asset due to its mobile nature. 30% of STFCs topline arises from securitization. Securitization, in many ways, is quite an esoteric and complex subject and future income has been forecasted using certain base case parameters. If those parameters are not fulfilled or if the buyers of securitized assets were to refrain from doing so in the future, or if greater regulatory restrictions were imposed by the authorities, forecasted valuations could stray. Over the last few months one has seen the RBI pay greater attention to the NBFC sector with a slew of new regulations, removal of PSL (Priority Sector Lending) status and making bank lending to NBFCs dearer. Measures of this sort could continue to germinate in the months ahead, making life harder for the NBFCs.

25000.00 20000.00 15000.00 10000.00 5000.00 0.00 08-Jun-09 08-Jun-10

1000.00 800.00 600.00 400.00 200.00 0.00

SENSEX

STFC

Shareholding Pattern (%) Total of Promoter and Promoter Group Public Shareholding: Institutions Non-Institutions Total Public Shareholding 43.58% 15.13% 58.71% 41.29%

Source: Multiple sources

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Contents BRIEF PROFILE .............................................................................................................................................................................. 1 BUSINESS ...................................................................................................................................................................................... 2 OUTLOOK AND SCOPE.................................................................................................................................................................. 5 SECTOR ......................................................................................................................................................................................... 7 FINANCIALS ................................................................................................................................................................................ 13 HISTORICAL FINANCIALS ........................................................................................................................................................ 13 FINANCIAL OUTLOOK ............................................................................................................................................................. 16 RISKS........................................................................................................................................................................................... 18 INVESTMENT RATIONALE........................................................................................................................................................... 20 Financial Highlights-Standalone ................................................................................................................................................. 23 Financial Ratios .......................................................................................................................................................................... 24 FINANCIALS GRAPH AND PEER GROUP COMPARISON .............................................................................................................. 25 ANALYST NOTES AND COMPANY NEWS .................................................................................................................................... 26

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BRIEF PROFILE
TOP MANAGEMENT
Chairman : Arun Duggal Managing Director : R. Sridhar Director : Puneet Bhatia Director : Ranvir Dewan Director : S Venkatakrishnan Director : Maya Shankar V Director : Sumati Bafna Director : Mukund Chitale Director: Adit Jain Director : S Lakshminarayanan

Shriram Transport Finance Corporation (STFC) is a deposit taking NBFC (Non Banking Finance Corporation) that was established in 1979. STFC is headquartered in Mumbai and is the flagship company of the Shriram Group which also has interests in chit funds, consumer durable finance, life insurance, general insurance, stock broking, property development, project engineering and wind energy among others. While STFC is primarily involved in the financing of 2nd hand and new Commercial Vehicles it has also recently branched into the construction equipment space. STFC enjoys the distinction of being Indias largest Asset Financing NBFC with a market share of 25% in the pre-owned CV (Commercial Vehicle) financing segment and a market share of 8% in the new CV financing segment. At the end of FY11 the company had an AUM (Assets Under Management) of Rs.36182 crores. Being a people driven and relationship oriented company, human resources are of stark importance to the companys operations. At the end of FY11 the company had employee strength of 16919 employees (including 9830 product and credit executives) and a customer base of 7.5 lakh. STFC has two wholly owned subsidiaries (which are of recent origin) namelyShriram Equipment Finance Limited and Shriram Automall Limited.

ADDRESS
Mookambika Complex, 3RD Floor, Number 4, Lady Desika Road, Mylapore, Chennai- 600004, TAMILNADU

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BUSINESS
STFC functions in an environment where there is low organized institutional competition. This is mainly due to the borrowing profile of the CV aspirers. Another contributing factor is the mobility of the collateral and the difficulty in determining optimum valuation of the vehicle. STFC mainly finances 2nd hand CV vehicles as yields are much better than new CV loans (yields of 1820% for the former compared to 12-13% for the latter). In addition to that the loan to value ratio is 65-70% for 2nd hand CVs compared to 85-90% for new CV loans. STFC has a market share of 25% in the 2nd hand CV loan market and 8% in the new CVloan market. It also has a partnership with 500 unorganized players. In addition to core CV loans STFC is also looking to finance tractors, 3 wheelers, MUVs and provide finance for working capital needs, tyre and engine replacements, bill discounting and the issue of credit cards. STFCs has 2 100% owned subsShriram Equipment Finance provides finance for new and 2nd hand construction equipment while Shriram Automall is responsible for running the CV buyer seller platform called Automall.

Unique Business Model Shriram Transport Finance Corporation (STFC) is considered to be Indias largest asset backed NBFC (Non Banking Finance Company) but its expertise primarily arises in the financing of new and pre-owned commercial vehicles. The commercial vehicle industry is a crucial agent in Indias GDP growth levels but it has traditionally been neglected by the banking industry due to the profile of the borrowers (who mainly engage in cash transactions with poor banking habits) and the easy mobility of the collateral. Thus, this has resulted in a dearth of organized financing in the commercial vehicle industry (this is with particular reference to the 2nd hand CV market as the new CV market still has a strong degree of manufacturers backed NBFCs and banks) which is dominated by small unorganized players. In that sense, STFC is extremely well positioned as it is the single biggest organized player in CV financing (market size estimated to be Rs.45000 crore), particularly the 2nd hand CV financing, where yields are much superior to new CV financing (Yields in the new financing segment are estimated to be 1213% while yields in the 2nd hand CV financing segment are estimated to be 18-20%. Also the Loan to value (LTV) ratio in the 2 nd hand CV market is far lower at 65-70% compared to the Loan to Value (LTV) ratio for new CV loans which is around 85-90%. Dominant market share In an industry dominated by the unorganized segment, STFC enjoys a market share of 25% in the second hand CV financing market and a market share of 8% in the new CV financing market. With regard to its total disbursements for FY11 of close to Rs.20000 crore, 75% of that sum consisted of disbursements towards 2nd CVs with the rest accounting for new CVs. In order to enhance its dominant presence in the CV market STFC has also tied up with almost close to 500 unorganized private financers by getting into a partnership and providing them finance and tapping into their market knowledge. This will only expand STFCs market share.

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Strong competencies developed through experience Having been involved in this business of providing CV finance for over 3 decades, STFC has developed a strong expertise in areas of loan origination, valuation of pre-owned trucks and collection of dues and this is something that cannot be easily developed thereby providing the company with the benefit of strong entry barriers. The companys pan India presence with a network of 67 SBUs (Strategic Business Units) and 487 branches only strengthens this proposition. STFCs secondary business activities While CV financing is STFCs primary business it has gradually added other services to enhance its portfolio. The company has also recently started/looking to start financing tractors, three wheelers, multi-utility vehicles (MUVs) in addition to providing ancillary services such as working capital finance, engine replacement finance, bill discounting, credit cards for small truck owners (this is done via a partnership with Axis Bank where STFC, at the end of CY 2010 had distributed close to 160,000 cards). Income from securitization STFCs topline does not arise purely from the interest it receives on the CV loans it gives out but also by securitizing its assets. Securitization is something that is fast becoming an increasingly important component of STFCs topline as its share to the overall topline has been growing with every passing year (Income from securitization as a % of Net Sales for FY09, FY10 and FY11 have been 11%, 18% and 30% respectively while Securitization accounted for close to 45% of STFCs total AUM). What STFC does is that it takes a portion of its total truck receivables off balance sheet (as it helps boost NIMs and provides them with instant cash, cost of funds raised through securitization is 1-1.5% lower than the cost of borrowing from other sources and helps boost the CAR), repackages them, securitizes them and sells it to banks who are more than willing to purchase it from STFC in order to meet their priority sector lending targets. However what makes STFC stand out from most other companies that resort to securitization is that it does not provide for the full securitization income on the P&L at one go, but
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Source: STFC, Hedge Research

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rather amortizes it over the time period of the securitized assets (the management has stated that average loan period ofsecuritized assets is 2.5-4 years). This conservative mode of recognizing income from securitization is indeed a welcome measure.
ADVANTAGES OF SHRIRAM AUTOMALL

STFCs Subsidiaries STFC has two wholly subsidiaries called Shriram Equipment Finance and Shriram Automall Limited. The former is involved in the financing of pre-owned and new construction equipment while the latter owns, operates and manages Automall, which is the countrys first preowned commercial vehicle physical auction platform (Shriram Automall receives commission for facilitating the sale and providing advisory services). Shriram Equipment Finance was commenced in FY10 as the STFC management believed that the produce knowledge required for the segmented was quite comprehensive and warranted a dedicated entity to fulfill that. The company finances commercial construction equipment such as forklifts, cranes, loaders, etc. and is managed by an independent team of dedicated professionals having intensive product expertise. At the end of FY11, Shriram Equipment Finance had Assets under management of Rs.634 crores and a profit of Rs.1.1 crores. On the other hand, Shriram Automall began operations only in FY11 and is also involved in the sale of refurbished commercial vehicles. Shriram Automall is a useful tool for stimulating STFCs core activity (which is to provide finance for acquiring CVs). It throws up origination opportunities for STFC as it can fund the sale while Automall brokers the deal. Shriram Automall had posted a net loss of Rs. 13.9 crores for the fiscal.

Source of Fee based income

Origination opportunity for STFC as Shriram Automall brokers the deal Re-possessed stock can be easily liquidated Better realization of value of vehicles

Source:STFC

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New CV loans could wither in the near term due to difficult macro conditions such as a slowdown in GDP and IIP. 66% of the countrys goods are transported via road and a slowdown in those macro metrics will certainly result in a slowdown in CV sales. However 75% of STFCs loans are those of 2nd hand CV loans and this will more than offset the pressure seen in new CV loans. CVs that were bought in 20062007 are expected to come up for sale in the next few years as CVs usually change hands every 5 years. STFC has set a target of reaching Rs.50000 crore of AUM by FY13, growing at a CAGR of 17%. The company is expected to maintain its historical spread of 7-8% as it has reduced its dependence on floating rate liabilities and securitizes a sizeable portion of its assets. The company is also in a position to pass on costs if required. Shriram Equipment Finance and Shriram Automall are expected to boost consolidated results. The former is looking to reach an AUM of Rs.6000 crore by FY13 from the current figure of Rs.634 crore while the latter is looking to open another 50-60 Automalls across the country over the next two years.

OUTLOOK AND SCOPE

New CV loans could slowdown but will be more than offset by 2nd hand CV loans STFCS core business of providing finance to fund the purchase of commercial vehicles has been extremely prosperous for a number of years now (AUM growth of 25% CAGR in the last 2 years) and while there is no reason to believe that the company will flounder, one would have to prepare for a slowdown in AUM growth and disbursements due to the hike of interest rates and fuel prices. This will also result in a slowdown in the GDP and the IIP rates of the country and the Indian CV industry has traditionally had a strong correlation with the performance of those two indicators as around 66% of the goods are transported via road. However interest rates will not have an enormously direct impact on STFC as it is easy to forget that the company is primarily involved in funding the purchase of 2 nd hand CVs which are less prone to the interest rate cyclicality compared to new CV sales (75% of STFCs loan disbursements in FY11 were towards 2 nd hand CVs with new CVs only accounting for 25%). CVs are usually sold after 4-5 years thus the CVs bought during 2006-2007 will come up for sale in the current year and that cycle will carry forward. Thus the company has reason to feel optimistic about its topline outlook due to its unique business model and has in fact set a target of reaching Rs.50000 crore of AUM by FY13. This is certainly achievable as it would mean a 17% CAGR growth over the next 2 years relative to the companys historical growth rate of 25% CAGR. The company is also going to be entering new territories of financing which are in close relation to the companys existing core business. Activities include the financing of tractors, three wheelers and MUVs in addition to ancillary services such as working capital finance, engine replacement and tyre replacement finance. Historical spread of 7-8% is likely to be maintained While the top line is expected to be robust there could be some pressure on STFCs NIMs as the cost of borrowings is likely to go up due to the hike in bank interest rates. However the STFC management has
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shown good foresight in determining this trend and one has already seen their reduced exposure to bank term loans and cash credit (which are the main sources of flexible floating rates). Fixed deposits, NCDs (Non Covertible Debenture), Securitization and Borrowings from institutions and mutual funds are the fixed rate options. Previously the breakup of STFCs borrowing was 76-24% in favour of floating rates of interest but that has changed to 50:50% off late. Bank term loans carrying floating rates of interest grew by 11.5% from FY09 to FY10 but was flat in FY11 over FY10 growing by a meagre .086%. Cash credit ( the other floating rate liability item) has been declining for the last two years even as the proportion of fixed rate borrowing sources has gone up. In fact over the next few months STFC is expected to go for a NCD issue of not more than Rs.2000 crore. Due to its strong brand recall and being the single biggest organized player in the industry it is also in a position to pass on the prices to the customer if needed. In addition to that STFCs securitization funding is expected to be a key tool to counter the threat of a declining NIM. One is therefore expecting the company to continue to maintain its historical spread of around 7-8%. STFCs subsidiaries to play a key role STFCs two subsidiaries are of recent origin having only commenced business in the last two years). Shriram Equipment Finance Limited is involved in the business of providing funds for the purchase of preowned and new construction equipment such as forklifts, cranes and loaders amongst other things. At the end of FY11 the company had an AUM of Rs.634 crores and is now targeting an AUM of Rs.6000 crore by FY13. The company posted a profit of a little over Rs.1 crore in the previous year. The other subsidiary- Shriram Automall is more closely aligned to STFCs core activity of financing CVs as it is responsible for running a common platform where buyers and sellers of CVs meet (Shriram Automall receives commission for brokering sales and it provides a good origination opportunity to fund the purchase of CVs). Automall is a first of its kind in India and gives STFC a good opportunity to enhance its expertise in asset valuation. The company opened its first Automall in Chennai and is planning to open another 50-60 Automalls (with parking space for 250 vehicles) over the next two years.
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HISTORY OF INDIAN NBFCs

SECTOR
The Indian Non Banking Finance Companies (NBFCs) accounts for a critical part of the countrys overall financial system. It is estimated that the NBFCs as a whole account for 9.1% or Rs. 4 trillion of assets of the entire financial system in India. As with most growing industries the NBFC industry in India has undergone various structural changes (change in business models, change in the broader market dynamics and change in the regulatory regime) since the start of the decade and is today a more mature and developed industry, particularly after having come tackled, arguably one of the most difficult phases in its history- the global economic crisis of 2008-2009. History of Indian NBFCs At the beginning of the decade NBFCs in India faced considerable challenges ranging from high cost of funds, limited borrowing sources and limited diversification, low asset profile, intense competition from not just NBFCs but banks as well, difficulties in positioning themselves between the banks and the money lenders, tepid economic and industrial growth and a high degree of nonperforming assets. With time however those foibles began to get washed away as a fresh wave of changes began to envelop the sector. The NBFCs were able to broaden their funding avenues and ensure greater diversification. The NBFCs borrowing profile extended beyond banks to include mutual funds, insurance companies and also using the rather innovative mode of securitizing their loans. One also began to see greater provisioning and an improvement on the asset quality and overheads. People also began to look at NBFCs in a better light and they were able to position themselves in between the banks (a lot of borrowers were not bank worthy and couldnt meet the norms prescribed by the banks) and the moneylenders (who used to charge usurious rates of interest). Nonetheless the financial crisis from 2008-2010 caused a significant dent to the NBFC industry Since the NBFC business is essentially an institutional funded business, during the post-Lehmann crisis, credit
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The beginning of the last decade was very challenging for NBFC as they had to starve off issues such as high cost of funds, low asset profile, intense competition, positioning difficulties, slow economic and industrial growth and a high degree of NPAs. However with time NBFC s were able to rectify much of these issues before the credit crisis of 2008 stuck sending them back into the doldrums. The largely institutionally funded NBFC industry struggled in an era of where credit confidence was ebbing away. Loss of employment, deterioration in asset quality and lack of liquidity were some of the standout characteristics of NBFCs during that phase. The RBI came to the rescue of the NBFCs by providing a range of measures such as opening up a special repo window under the Liquidity Adjustment Facility, creation of an SPV for liquidity support, deffering higher CAR norms for NBFCs and reducing risk weights on banks exposure to NBFCs. NBFCs with a strong parentage such as Mahindra Finance and Shriram Transport Finance Company were able to cope and rebound quicker than most others.

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disappeared off the table, as the purse strings were tightened and confidence evaporated. With money becoming scarce it began to affect NBFCs from both the asset and liability sides. The dearth of liquidity and credit also resulted in a loss of confidence in the financial system with the banks unwilling to give out credit. Not just banks, sourcing from mutual funds too became a no-show as the mutual fund industry saw widespread redemption pressures with investors opting for investment in safer havens or just holding plain cash. With the NBFCs key credit lines being asphyxiated, it caused a severe dearth of liquidity. Their problems were further compounded at the other end, with the dissipation in liquidity, confidence and demand, resulting in lower income available with the borrowers, thereby stunting their ability to pay off the loans taken during the pre-Lehmann phase. Loss of employment due to cost cutting measures was another factor that contributed to the inability to pay off loans. This consequently resulted in large scale defaults and an increase in the Non Performing Assets (NPAs) of the NBFCs. Another problem that NBFCs faced was that more than half of their borrowings had a maturity period of less than a year while their loans had tenures of more than three years. This asset liability mismatch caused severe strains on their financials. NBFCs that had provided a high degree of unsecured loans (personal loans, unsecured SME loans), came under particular strain during this period. However picking up on the woes of the NBFCs and realizing their importance to the financial system as a whole, the RBI (Reserve Bank of India) came up with a slew of measures to boost up the NBFC industry. Banks were permitted to avail the liquidity support under the LAF (Liquidity Adjustment Facility) in order to meet the funding needs of the NBFCs, a special repo window under the Liquidity Adjustment Facility (LAF) was provided for the NBFCs, an existing Special Purpose Vehicle (SPV) was used as a platform to provide liquidity support to NBFCs, non-deposit taking NBFCs (NBFCND-SI) were allowed to raise short-term foreign currency borrowings, the risk weights on banks exposures to claims on NBFCs-ND-SI were reduced from 150% to 100%, and higher CAR

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OUTLOOK FOR INDIAN NBFCs

(Capital Adequacy Ratio) norms for NBFCs-ND-SI were deferred by a year. Aided by those measures and a general pickup in credit and confidence, the fortunes of the NBFC industry began to change with time. Companies with a strong parentage (M&M Finance, Reliance Capital, Shriram Transport Finance) were better positioned to deal with the crisis as they were able to raise further equity and also implemented a re-aligning of their business models in order to preserve their stability. The improvement of confidence in the credit system also saw the asset liability mismatch reducing as banks were willing to lend to NBFCs for a greater time period as opposed to just a maximum time frame of one year. Asset quality too improved with more prudent credit norms, greater provisioning and the reduction in disbursement of unsecured loans. Outlook for NBFCs The outlook for the now robust NBFC industry looks fairly encouraging. However there is likely to be some pressure on the cost of borrowing as the RBI continues to employs a hardening interest rate regime. In order to tackle the rising interest rate regime, there is also a possibility of one seeing an increase in the unsecured loan segment which generally provides better yields. Off late, in addition to rising interest rates one is also beginning to see the RBI wield its regulatory powers on the NBFCs with greater emphasis. Recently in January 2011, the RBI came up with a notification asking NBFCs to maintain an additional provision of 0.25% on standard assets at all times as this will serve as a financial buffer during any particular crisis. Also the RBI has brought the CAR (Capital Adequacy Ratio) for both deposit taking and non-deposit taking NBFCs on par at 15% (Earlier non deposit taking NBFCs had to maintain a CAR of 15% while their deposit taking counterparts had to maintain a lower CAR of 12%). In addition to that the RBI has also expressed concerns that the banks have been extending more than necessary loans to the NBFC sector (close to 50%) and are
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In the interim, Indian NBFCs could come under a bit of pressure, as interest rates have been rising and the RBI has been exerting greater regulatory restrictions on the functioning of NBFCs. In Jan 2011, the RBI mandated all NBFCs to maintain an additional provision of 0.25% on standard assets and brought the CAR of both deposit taking and non-deposit taking NBFCs on par at 15%. Priority Sector Lending status that NBFCs used to benefit from earlier has been removed. There have been murmurs that the RBI could increase risk weights on bank loans provided to NBFCs as they are concerned that these funds are eventually reaching the capital market and the real estate sector (two areas that the RBI has sought to limit bank funds in the last). The risk weight measure is only one of the many possibilities that are threatening to jeopardize NBFCs operations. NBFCs with limited borrowing profiles and a severe dependence on bank credit are the most likely to be affected. One could perhaps see an increase in the disbursements of unsecured loans as NBFCs seek to boost yields in an era of costly sources of borrowing. Competition, particularly in the rural areas is likely to intensify as banks expand their operations.

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Indian CV Financing Industry The Indian CV industry only accounts for 5% of total auto sales in the country but is crucial from an economic perspective as 66% of the goods in the country travel via road. The growth in volume terms of CVs in India has averaged 11% in the last 5 years ended FY10, 13% in the 5 years ended FY05 and -3% for the 5 years ended FY00. In FY11 growth was 27%. Close to 70% of total CV sales in the country are 2nd hand CV sales as the industry is dominated by Small Truck Operators (STO)s who possess less than 5 trucks. Besides due to greater affordability with modern day credit, there is a greater sense of aspiration of truck drivers to become entrepreneurs and this is stimulating growth even more. The organized sector has largely stayed away from this industry due to the mobile nature of the security, difficulty in valuation, lack of a common and recognized platform for buying and selling trucks, limited banking habits, predominance of cash transactions and a lack of credit history and credit transactions. All these factors have made the CV financing industry a very fragmented industry.

seeking to limit this as these funds provided to the NBFCs tend to reach the capital market and the real estate sector (sectors which the banks are supposed to have limited exposure). There has been talk about increasing the risk weights on loans provided to NBFCs and the RBI has already removed the priority sector lending status of providing funds to NBFCs. Interestingly enough securitization (which is a key component of STFCs business will still continue to receive priority sector lending status from the banks). NBFCs with a strong dependence on bank loans with limited diversification of borrowing sources will be the most affected. The NBFCs will also have to deal with intensified competition particularly in the rural areas as banks are fast increasing their presence in those territories. Vehicle finance industry The auto finance companies that saw a 25% fall in disbursements during FY09 have since seen a pickup in the following periods. The situation has mainly improved due to the reduction of interest rates, reduction in the uncertainty over income growth and higher consumer confidence. The pickup in disbursements coupled with strong credit-appraised mechanisms bode well for the future of the auto financing industry. However one is already beginning to see a slowdown in the growth rates of the automobile sector and this is likely to act as an overhang on the automobile finance companies. In addition to that companies involved in the automobile finance industry (such as Shriram Transport Finance, Mahindra Finance and so on and so forth) are always susceptible to the risk of collateral as the collateral is movable. Indian Commercial Vehicle Industry The Commercial Vehicle industry accounts for only 5% of the total automobile sales in India but it is very important to the economy as approximately 66% of the goods in the country move via road. The CV industry has a very close correlation with the GDP and the IIP of the country and is indicative of an upturn or downturn in an economy. The commercial vehicle industry grew by 27% yoy during

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FY11. The growth in volume terms of commercial vehicles in India has averaged 11% in real terms for the last 5 years ended FY10, compared to 13% for the 5 years ended FY05 and -3% for the 5 years ended FY00. There is tremendous scope for growth in the commercial vehicle segment in India as the countrys stock of commercial vehicle is relatively low at 6 vehicles per thousand people versus 11% for China and 48% for other Asian countries. Rising GDP growth and an increase in infrastructure spending are expected to boost this ratio. THE INDIAN CV FINANCING INDUSTRY DYNAMICS
New CVs Year Market Size (Approx) Dominated by Yields (%) LTV Operator Loan tenure Primary Usage 1-5 years 45000 crores Manufacturers' backed NBFCs and Banks 12-13% 85-90% LTO 3-5 years Metros and big citiesLong haul Pre-owned CVs >5 years 45000 crores

Unorganized players 18-20% 65-70% STO 2-4 years Interstate and small towns

Primary Growth drivers

Higher GDP/IIP

Increased freight rates and rising aspiration of drivers

Source: STFC, Industry Data, Hedge Research

Indian Commercial Vehicle Financing Industry The Commercial Vehicle (CV) financing industry is one of the most competitive and fragmented retail financing industries with a dominant unorganized component. What must also be noted is that close to 70% of the total CV sales are the 2nd hand CV sales as the industry is dominated by small truck owners (STO)/ operators who typically possess less than 5 trucks. Also due to the higher

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affordability of 2nd hand CVs truck drivers aspiring to become entrepreneurs are the ones fuelling this growth. The dominance ofthe unorganized segment (private financiers) is such due to the following reasons. Firstly the profile of the STOs is perceived to be risky due to their lack of credit history and tax returns (thereby making credit worthiness difficult to determine) limited banking habits and predominance of dealing in cash. Also considering that the vehicle is the source of livelihood for the STOs there is the risk of mobility and keeping track of the asset. All these factors make the STOs ineligible for the standard institutionalized credit criteria whereas the private financiers are quite compliant. In addition to that there is a lack of a recognized platform for trading of preowned commercial vehicles resulting in difficulties in the valuation of the asset. This has resulted in a perceived asset-liability mismatch for the organized and institutional lenders.

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FINANCIALS
HISTORICAL FINANCIALS STFCs AUM from FY09 to FY11 has grown at a CAGR of 25%. From FY09 to FY11 the off balance sheet assets as a % of total AUM has changed from 23% to 45% Yearly loan disbursements have grown at a 2 year CAGR of 31%. New CVs as a % of total CV disbursements has been growing for the last 3 years. From FY09 to FY11 it has grown from 16% to 25%. Income from securitization in the last 2 years has grown at a whopping CAGR of 96% but growth in the interest on loans component has been rather serene growing only at 8% CAGR. STFC has a rather diversified borrowing profile. Floating rate liabilities as a % of fixed rate liabilities has shifted from 76:24% to 50:50% in order to cope with the rising interest rate regime. Operating expenses as % of Net sales has fluctuated from 11-14% over the last 3 years. Net profits in the last 2 years have grown at a CAGR of 42% while net profit margins have grown with every passing year from 16.7% in FY09 to 19.8% in FY10 to 23.7% in FY11. Dividend payouts have been declining for the last 6 years. FY11 figure stood at 12% relative to the FY05 figure of 34%.

HISTORICAL FINANCIALS
AUM and disbursements

When one is involved in the industry that STFC is involved in, with strong entry barriers, pricing power and the lack of strong institutional competition one would expect STFCs historical financials to paint a good impression. STFCs financials over the last 2 years have been quite impressive with strong growth rates seen across the AUM, top line and bottom line. STFCs AUM which consists of truck receivables has grown from FY09 to FY11 at a CAGR of 25%. It must be noted that a portion of this total AUM will be taken off balance sheet and securitized. Interestingly enough the company has been increasing the component of its securitized assets (off balance sheet items) with every passing year. From FY09 to FY11 the off balance sheet assets as a % of Total AUM has changed from 23% to 45%. The management has stressed that it resorts to greater securitization to protect NIMs in a rising interest rate scenario. Yearly disbursements too have been quite healthy growing at a 2 year CAGR of 31%. It is well documented that STFC is primarily involved in the financing of 2nd hand CVs but whats quite interesting is that in the last 2 years the proportion of new CVs as a % of total CVs has increased its share. New CVs as a % of total disbursements have grown from 16% to 19% in FY10 and then again to 25% in FY11 One must also remember that yields for new CVs are lower than 2nd hand CVs. One could perhaps attribute this shift in the disbursement profile to the fact that new auto sales in the country were quite robust over the last 2 years and hence STFC wanted to capitalize on that. Now with the slowdown in new CVs one could perhaps expect things to stabilize at the 25% mark or perhaps even decrease. Top line analysis As previously mentioned STFC takes a portion of its AUM off balance sheet which is then securitized and sold to banks and other

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institutions. STFC receives a sum from these banks and institutions which it does not recognize in the P&L straight away but amortizes it based on the time period of the securitized loans. This is the other component that makes up for STFCs top line in addition to the interest it receives on its on balance sheet loans. Surprisingly the interest it receives on on balance sheet assets has grown at a rather tepid pace and much of the growth in the top line has come from income from securitization. Income from securitization in the last two years has grown at a CAGR of 96% while interest on loans for the same time period has only grown at a CAGR of 8%. It is quite conceivable that the fact that the overall loan portfolio which used to comprise of a lesser proportion of new CV loans has gone up over the last 2 years and as previously mentioned new CV loans have a yields of atleast 500 -700 bps points lower than 2nd hand CVs and that could have resulted in an overall low growth in the interest income. NIM analysis STFCs NIMs for the last 2 years have been quite healthy. Its NIM (Including securitization income) on total AUM for FY10 stood at 7.4% and rose to 8.2% in the following year while the NIM (excluding securitization income) on total AUM for the same time periods stood at 4.7% and 3.9%. STFC has a rather diversified borrowing profile and this reduces the potential interest rate risk it could face in a rising interest rate scenario. One has already seen evidence of this over the last two years where the company has reduced the dependence of its floating rate liabilities in comparison to the fixed rate liabilities. The mix of floating interest rates to fixed interest rates liabilities has shifted from 76:24 to 50:50. One has already seen STFC reduce their exposure to bank term loans and cash credit (which are the main sources of flexible floating rates). Fixed deposits, NCDs (Non Convertible Debenture) , Securitization and Borrowings from institutions and mutual funds are the fixed rate options. Bank term loans carrying floating rates of interest grew by 11.5% from FY09 to FY10 but was flat in FY11 over FY10 growing by a meagre .086%. Cash credit (the other floating rate liability item)
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has been declining for the last two years even as the proportion of fixed rate borrowing sources has gone up. Operating expenses, Profits and Dividends Total operating expenses as a % of Net Sales has fluctuated from 13% in FY09 to 11% in FY10 to 14% in FY11. Total provisions as a % of net sales has grown from 8.5% to 9.5% and 9.6% during the three years but has been extremely consistent when viewed from an AUM perspective. Total provisions as a % of AUM have been constant at 1.4% for the last three years. The RBI had mandated in January 2011 that all NBFCs have to maintain an additional provision of 0.25% on standard assets and that has been built in (Rs.49 crore) since the 4th quarter of FY11. All in all Profits have grown from Rs. 612 crores to Rs. 1229 crores at a CAGR of 42%. Profit margins have been growing every year. At FY09 it stood at 16.7% and has since moved up to 19.8% and 23.7% for the next 2 years. Dividend payout ratios are a little worrying as it has been declining with every passing year since FY05. At the end of FY05 the dividend payout ratio had stood at 34% but has decline since then to reach 12% at the end of FY11. FY11 FINANCIAL PERFORMANCE OF STFCs SUBSIDIARIES
FY11 FINANCIALS (in crores) Sh. Capital Reserves Book value per share Sales PAT

Shriram Equipment Finance Company Limited

160.00

1.13

7.12

20.17

1.16

Shriram Automall India Limited

10.00

-13.92

-0.17

62.16 -13.92

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FINANCIAL OUTLOOK

FINANCIAL OUTLOOK
Total AUM growth is expected to slowdown to 17-18% from FY10 the PAT had reached a much historical levels of 25%. This is mainly due to the likely slowdown in new CV sales. Income from securitization is expected to be strong growing by 40% over the next 2 years. Total net sales is expected to grow from Rs. 5259 crores to more than Rs. 8150 crores at a CAGR of 24%. Our model is based on a constant interest spread of 7-8%. STFC is well positioned to maintain this as its fixed and floating rate liabilities are equally balanced. The company is on the verge of beginning an NCD issue of around Rs.2000 crores. Operating expenses as a % of Net sales are expected to be 14% while provisions as a % of net sales could come down marginally from 9.63% to 9.17% mainly due to the strong growth in net sales. Profits are expected to grow at a CAGR of 38% with forecasted profit margins of 26.5% and 29.7% for the next 2 years. SOTP Discounted earnings+ depreciation target is Rs.751 while PE target is Rs.756.

AUM

While various banks are fast making their presence felt in rural India and the CV financing segment, we feel that STFC will still enjoy the merits of strong entry barriers particularly as it is difficult to develop the expertise that the company has developed over the last three decades in the 2nd hand CV market. The rising interest rate regime and a slowdown in GDP growth could prove to be pejorative towards top line growth, as CV sales will not be quite as robust, particularly new CV sales. We are expecting total AUM growth for the next two years to be around 17-18% relative to the historical growth rates of 25%. One also expects STFC to continue with the existing breakup of 55:45 onbook-offbook in order to deal with the rising interest rates. Net sales While computing income from securitization we have assumed an average time period of 4 years. Our model is contingent on the company assuming a time period of 4 years and any a reduction in that time period could result in valuations shooting up. We believe the income from securitization will continue to be a strong contributor to the top line growing by more than 40% over the next 2 years. All in all total income (net sales) is expected to grow from Rs. 5259 crores to Rs. 8151 crores growing at a CAGR of 24%. NIM and interest spread A key facet of our model is the spread that STFC enjoys (interest income-interest expenses %) and we believe the management will be able to maintain its historical spread of 7-8%. We believe the STFC management has sufficient tools to deal with the rising interest rate scenario and NIMs are expected to be strong. One is expecting the fixed income rate liabilities to aid STFC during this scenario. In fact over the next few months STFC is expected to go for a NCD issue of not more than Rs.2000 crore. Due to its strong brand recall and being the single biggest organized player in the industry it
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SENSITIVITY ANALYSIS
Total Yearly AUM growth 12% 15% 17% 20% Total Interest spread 6% 610 634 652 680 7% 653 681 701 733 8% 697 728 751 787 9% 740 768 793 840

is also in a position to pass on the prices to the customer if needed. In addition to that STFCs securitization funding is expected to be a key tool to counter the threat of a declining NIM. NIMs (including securitization income) on total AUM are expected to be 9.2% and 10.3% for FY12 and FY13 respectively. Operating expenses and provisions Total operating expenses as a % of Net sales is expected to be 14% while provisions as a % of net sales could come down from 9.6% to 9.17%. There is no particular reason why provisions are expected to be decline as we are basing our provision expense on the total AUM figure as this has been extremely consistent at 1.4% in the last three years and that will be the rate going forward. Profits, EPS and Price target All in all profits are expected to grow from Rs. 1229 crores to Rs. 2337 crores at a CAGR of 38%. Profit margins are expected to continue their northward journey to 26.5% and 29.7% over the next two years. We are forecasting EPS for the next two years to be Rs.76 and Rs.103. Our DCF SOTP (inclusive of Shriram Equipment Finance) analysis suggests that the fair value of the share is Rs.751. While, if one were to employ a conservative PE multiple of 10 that also works out to a similar price target OFF Rs.756 based on FY12EPS.

STFC's FINANCIAL TABLE

(In crores)

FY10 4402.83 873.12 38.60 16.76

FY11 5259.71 1229.88 54.38 11.90

FY12E 6456.10 1713.35 75.75 8.54

FY13E 8093.06 2324.59 102.77 6.30

SALES PAT EPS PE

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RISKS
Target market With all the praise thats been lavished on STFCs business model and its lack of concrete institutional competition its easy to forget why institutions have more or less stayed away. This is primarily due to the customer profiles of STFCs target market. The Small Truck Operators (STO)s are people with no or limited banking habits, limited or no use of credit or credit history and a large number of transactions in cash. In addition to that the collateral is also movable and it is difficult to keep track of the asset. Valuing the asset is another additional burden that organized players have struggled with. Correlation with macro-economic indicators New CV sales have a very strong correlation with economic indicators such as the GDP and the IIP as close to 66% of the goods in the country are transported via road transport. One has already begun to see evidence of a slowdown in both the indicators and that coupled with high interest rates are bound to affect new CV sales. Regulatory changes Recently the NBFC sector has been subject to more scrutiny by the RBI who are concerned that banks may perhaps be lending more than what is required to the NBFC sector which in turn is resulting in exorbitant sums of money reaching the capital markets and the real estate sector (two sectors in which the RBI wants banks to limit their exposure to). One has already seen the RBI remove the priority sector lending status for bank loans given to NBFCs thereby making it dearer. In addition to that the RBI may also levy more provisions on NBFCs like it did in January 2011 (asking NBFCs to maintain 0.25% of their standard assets as provisions for a financial buffer in the future). Securitization complexities An important portion of STFCs top line (30%) comes from its amortized securitized income and this has all the makings of a rather esoteric subject. While we welcome the companys decision
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RISKS
STFCs target market is a risky breed as they are people with limited banking habits, no credit history and a large number of transactions in cash. In addition to that the collateral is also movable and difficult to keep track. CV sales have a high correlation with economic indicators such as GDP and IIP and both are expected to see some pressure in the current year. The RBI seems to be wielding its regulatory wand with greater purpose on the NBFC industry and there are indications that it could well continue in the near term putting pressure on their business models and financials. STFC receives 30% of its topline from securitization and this is a rather complex and esoteric subject to forecast. In addition to that there have been rumours suggesting the RBI could impose some restrictions on securitization.

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not to recognize the lump sum securitized income it receives for the sale of its off balance sheet loans at one go, there are considerable complexities in recognizing and forecasting this income. To highlight further the importance of securitization one could look at the breakup of the total AUM of STFC for FY11. It stood at 45% relative to the previous two year figures of 38% and 23%. In addition to that top line growth for FY11 was mainly driven by income from securitization which grew by 200% relative to income from loans which grew by a meagre 2%. This increasing dependence on securitization, while healthy from a CAR capacity is a slight worry, mainly due to its complexities and also due to the fact that there have been rumours that the RBI would look to bring greater regulation into securitization.

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INVESTMENT RATIONALE
INVESTMENT RATIONALE
STFC has a very unique business model that is difficult to replicate in a short time period and it is supported by strong entries to barriers and pricing power. The company enjoys a pan India presence with 487 branches and has tied up with 500 private unorganized financiers to strengthen its market reach. The company is looking to expand its product portfolio by introducing financing of tractors, three wheelers, MUVs. Besides it is also looking to provide finance for working capital, engine and tyre replacement finance and coissuing credit cards. STFCs subsidiaries have set rather ambitious targets over the next two years and their business models too glimmer with great prospects. STFC is well positioned to tackle rising interest rates as it has reduced its dependence on floating rate liabilities and has a diversified pool of borrowings. The company has an exceptional CAR ratio of 25% well above the RBIs mandate of 15%. The stock can be bought at below Rs.630 levels with a discounted SOTP discounted earnings+dep target of Rs.751 or FY12E eps PE target of Rs.756. Unique Business Model

The company has a very unique business model and is the only listed player of its kind. It must be noted that the commercial vehicle financing industry is an industry that has traditionally been neglected by direct bank credit mainly due to the profile of the borrowers, the limited banking habits that these borrowers practice (most of the transactions that CV owners engage in, are cash transactions, there is a lack of credit history) and the fact that collateral is extremely mobile. This has consequently led to a dearth of organized financing in the commercial vehicle industry. A company such as STFC has developed a very strong expertise in this business having been around for over three decades. In addition to that 2nd financing of 2nd hand CVs (better yields than new CV loans) are something that brings its own share of complexities that only an established player such as STFC can cope with. In over three decades the company has developed strong competencies in the areas of loan origination valuation of the 2nd hand CVs and collection. Pan India presence STFC already has a very strong pan-India presence with 487 branches and while it will continue to grow organically, inorganically as well it has tied up with 500 private unorganized financers across the country and this will only strengthen its reach and network. Expanding product portfolio In addition to its core activities it has added new activities to its portfolio such as the financing of tractors, three wheelers and MUVs, in addition to ancillary services such as working capital finance, engine replacement and tyre replacement finance. Also, the company is looking to promote a level of banking literacy in the rural territories by tying up with Axis Bank to issue credit cards.

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STFCs subsidiaries have great potential The activities in which STFCs subs are involved in have the potential to flourish in the long run even though their current financials may suggest otherwise particularly Shriram Automall which posted a loss of Rs. 14 crores for the fiscal. In fact Shriram Automall can serve as a useful fulcrum in aiding STFC in its core activities. Shriram Automall is responsible for running Automall- a common platform where buyers and sellers meet to sell a vehicle. Shriram Automall receives a commission for this and by serving as a middleman it can only enhance its expertise in the valuation of vehicles enabling STFC to become a standard in the valuation of 2nd hand CV vehicles in the country. Besides it provides a useful leg-up for STFC as it opens up loan origination opportunities for the company after Shriram Automall has brokered the deal. The company expects to open another 50-60 Automalls over the next 2 years. Shriram Equipment Finance is an indirect play on the countrys infrastructure segment as it is involved in the financing of new and 2nd hand construction equipment such as forklifts, cranes and loaders amongst other things. At the end of FY11 the company had an AUM of Rs.634 crores and is looking to ramp up its AUM by close to 10 times by reaching Rs.6000 crore in FY13. Well positioned to tackle rising interest rates due to diversified borrowing portfolio and strong credit ratings STFC is in a good position to tackle a rising interest rate scenario due to its diversified borrowing portfolio. It has reduced its dependence on bank term loans and cash credit which are the major floating rate liabilities. Fixed deposits, NCDs (Non Covertible Debenture) , and Borrowings from institutions and mutual funds are the fixed rate options. Bank term loans carrying floating rates of interest grew by 11.5% from FY09 to FY10 but was flat in FY11 over FY10 growing by a meagre .086%. Cash credit (the other floating rate liability item) has been declining for the last two years even as the proportion of fixed rate borrowing sources has gone up. In fact very soon the company is going to be completing a

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Rs.2000 crore NCD issue. In addition to that we believe the income it receives from securitization is a big bonus asit is estimated to be 1-1.5% cheaper than other sources. Banks and other institutions are more than willing to buy the securitized loans of STFC due to their stong credit ratings that it enjoys with the major raters across the country. We also welcome STFCs mode of recognition of this securitized income as it does not recognize the entire sum it receives from banks and institutions at one go but rather amortizes it over the time period of the securitized loans. High CAR much above the required mandate STFCs CAR (Capital Adequacy Ratio) is very reassuring, and is comfortably above the RBIs mandate of 15%. For the last two years the companys CAR has stood at 21.3% and 24.8% respectively. This opens up opportunities for greater leveraging and efficiencies in the business. Share price target of Rs.751-Rs.765 The STFC stock can be bought at levels below Rs.630 and can be held till the Rs.751 level based on our discounted earnings + depreciation target or held till Rs. 756 based on our FY12e eps using a conservative PE multiple of 10. It must be noted that STFCs 5 year trailing PE has averaged 14.5 so there could be even greater upside beyond Rs.756 but we will review the position of the stock once it gets to the target levels.

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Financial Highlights-Standalone
DESCRIPTION Gross Sales Total Income Total Expenditure PBIDT PBIT PBT PAT Cash Profit Equity Paid Up Reserves and Surplus Net Worth Total Debt Capital Employed Gross Block Investments Cash and Bank balance Net Current Assets Total Current Liabilities Total Assets FY11 FY10 FY09 Inc / Exp Performance 5230.15 4399.06 3659.19 5436.80 4501.38 3738.79 1305.09 915.02 800.08 4131.71 3586.36 2938.72 4120.89 3571.40 2898.30 1848.93 1324.59 920.63 1229.88 873.12 612.40 1240.70 888.08 652.82 Sources of Funds 226.16 225.52 203.51 4674.66 3609.22 2067.57 4863.88 3797.65 2271.09 19881.71 18459.91 20121.31 24749.16 22265.21 22437.95 Application of Funds 98.40 97.62 240.50 3650.70 1856.02 654.76 3625.11 4537.33 5784.90 20906.34 20288.02 21622.52 8935.16 6089.37 4898.58 24786.11 22302.29 22437.95 Cash Flow -524.76 867.64 -1555.53 FY08 2453.29 2516.77 577.26 1939.51 1902.45 605.83 389.83 426.89 FY07 1396.30 1421.18 383.78 1037.41 1027.56 289.22 190.40 200.25 FY06 898.43 908.67 267.65 641.02 631.23 216.17 141.64 151.43

203.14 184.16 150.54 1570.72 882.23 646.23 1773.85 1066.25 796.36 14773.03 8709.27 4396.09 16589.39 9795.55 5234.57 210.09 182.39 183.66 1385.12 224.57 9.15 1374.20 1810.64 252.88 15097.54 9490.13 5202.29 1643.30 953.19 850.35 16589.39 9795.68 5234.98 -5768.01 2565.66 3308.64 -550.52 -122.54 4351.95 3438.18 3084.87 3544.08 2195.17 1966.06 2.06 2.47 30.00 30.00 9093.80 6109.27 2.52 2.30
Source: Ace Equity

Cash Flow from Operations Cash Flow from Investing activities Cash Flow from Finance activities Free Cash flow Market Capitalization Price / Book Value(x) Equity Dividend % Enterprise Value Dividend Yield %

-1538.17 -1961.79 263.55 -1462.85 1241.21 -1043.29 5230.53 6462.63 3345.07 1231.87 3058.46 6730.11 Market Cues 18000.13 11821.64 3729.35 6809.10 3.70 3.11 1.64 3.84 65.00 60.00 50.00 50.00 34256.73 25744.22 18065.76 20207.92 0.82 1.14 2.73 1.49

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Financial Ratios
DESCRIPTION FY11 FY10 FY09 FY08 Operational & Financial Ratios Earnings Per Share (Rs) 54.38 38.72 30.09 19.19 CEPS(Rs) 54.86 39.38 32.08 21.01 DPS(Rs) 6.50 6.00 5.00 5.00 Adj DPS(Rs) 6.50 6.00 5.00 5.00 Book Value (Rs) 215.06 168.40 111.59 87.32 Tax Rate(%) 33.48 34.08 33.48 35.65 Dividend Pay Out Ratio(%) 11.95 15.50 16.62 26.05 Margin Ratios PBIDTM (%) 79.00 81.53 80.31 79.06 EBITM (%) 78.79 81.19 79.21 77.55 Pre Tax Margin(%) 35.35 30.11 25.16 24.69 PATM (%) 23.52 19.85 16.74 15.89 CPM(%) 23.72 20.19 17.84 17.40 Performance Ratios ROA (%) 5.22 3.90 3.14 2.95 ROE (%) 28.40 28.95 30.28 27.45 ROCE (%) 17.53 15.99 14.85 14.42 Asset Turnover(x) 0.22 0.20 0.19 0.19 Sales/Fixed Asset(x) 53.36 26.02 16.24 12.50 Efficiency Ratios Fixed Capital/Sales(x) 0.02 0.04 0.06 0.08 Receivable days 0.00 0.00 0.32 0.44 Payable days 239.45 219.24 127.78 66.93 Growth Ratio Net Sales Growth(%) 18.89 20.22 49.15 75.70 Core EBITDA Growth(%) 15.21 22.04 51.52 86.96 EBIT Growth(%) 15.39 23.22 52.35 85.14 PAT Growth(%) 40.86 42.57 57.10 104.74 EPS Growth(%) 40.46 28.66 56.81 85.62 Financial Stability Ratios Total Debt/Equity(x) 4.09 4.86 8.86 8.33 Quick Ratio(x) 5.79 7.47 15.52 13.40 Interest Cover(x) 1.81 1.59 1.47 1.47 Total Debt/Mcap(x) 1.10 1.56 5.40 2.17 FY07 10.34 10.87 3.00 3.00 57.90 34.17 29.02 74.30 73.59 20.71 13.64 14.34 2.53 20.44 13.67 0.19 7.63 FY06 9.13 10.06 3.00 3.00 52.90 34.48 32.87 71.35 70.26 24.06 15.77 16.85 4.09 28.53 18.25 0.26 7.24 FY05 7.19 8.26 2.50 2.50 30.06 36.66 34.77 71.47 70.09 22.68 14.37 15.74 3.61 34.19 17.63 0.25 5.19

0.13 0.14 0.19 37.14 115.69 384.69 58.90 31.85 43.53 55.41 61.84 62.79 34.42 13.27 8.17 14.10 1.39 3.97 161.67 161.23 162.28 187.17 26.95 5.52 11.32 1.52 2.24 37.47 37.89 39.64 33.89 -12.70 6.58 10.04 1.48 4.06

Source: Ace Equity

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FINANCIALS GRAPH AND PEER GROUP COMPARISON

STFC's 4 year FINANCIAL GRAPH

9000 8000 7000 6000 5000 4000 3000 2000 1000 0 FY10 FY11 SALES PAT FY12E EPS PE Source: STFC, Hedge Research FY13E

Peer Group Comparison (Standalone)

Company Name India Securities Rel. Capital Muthoot Finance Mah. Finan Shriram Trans. Fin
Year End Net Sales PBIDT PAT Adj. EPS(Rs) PBIDTM% PATM% ROCE% ROE%

FY11 FY11 FY11 FY11 FY11

3.01 1808.81 2298.34 1973.93 5259.71

-365 1471.7 1811.82 1409.88 4131.71

-368.77 229.27 494.18 463.11 1229.88

-18.48 9.31 15.43 45.2 54.38

-11624.36 79.97 78.83 71.42 79

-11744.14 12.46 21.5 23.46 23.52

-185.01 7.65 28.75 15.91 17.53

-190.24 3.24 51.5 21.97 28.4

Source: Ace Equity

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ANALYST NOTES AND COMPANY NEWS

11/6/2011 STFC should be bought at levels below Rs.630 with a price target of Rs.751-Rs.756.

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Researched and prepared by: Amar Chandramohan Sr. Fundamental Analyst Email: amar.c@hedgeequities.com Ph: (0484) 3040400, 3040419 In collaboration with Muhammed Aslam E Fundamental Analyst Email: muhammedaslam.e@hedgeequities.com

Krishnan Thampi K Head of Research and Strategies Email: krishnanthampi.k@hedgeequities.com

HEDGE RESEARCH & STRATEGIES GROUP Head of Research: Krishnan Thampi K Sr. Fundamental Analyst: Amar Chandramohan Jr. Fundamental Analyst: Muhammed Aslam E Jr. Fundamental Analyst: Neha Mahajan Jr. Fundamental Analyst: Vignesh SBK Sr. Equity Technical Analyst: Anish Chandran C V Sr. Commodity & Equity Technical Analyst: Kesavamoorthy B Futures & Options Analyst: Yunus Ismail Access all our research reports online at www.HedgeEquities.com

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Research & Strategies Group Hedge Equities Ltd 12 Floor, -Mini Muthoot Tech Towers Kaloor, Kochi 682017, Kerala, India Phone: (0484) 3040400 Email: research@HedgeEquities.com

Disclaimer The information contained in our report does not constitute an offer to sell securities or the solicitation of an offer to buy, any security. This report is prepared for private circulation only. The information in our report is not intended as financial advice. Hedge Equities Ltd does not undertake the responsibility for any investment decision taken by the readers based on this report. Moreover, none of the information in the research report is intended as a prospectus within the meaning of the applicable laws of any jurisdiction. The information and opinions contained in our research reports have been compiled or arrived at from sources believed to be reliable in good faith, but no representation or warranty, express or implied, is made by Hedge Equities Ltd, to their accuracy. Moreover, you should be aware of the fact that investments in securities or other financial instruments involve risks. Past results do not guarantee future performance.

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