CRISIL IERIndependentEquityResearch

Shriram Transport Finance Company Ltd

Initiating Coverage

Enhancing investment decisions

CRISIL IERIndependentEquityResearch

Explanation of CRISIL Fundamental and Valuation (CFV) matrix

The CFV Matrix (CRISIL Fundamental and Valuation Matrix) addresses the two important analysis of an investment making process Analysis of Fundamentals (addressed through Fundamental Grade) and Analysis of Returns (Valuation Grade) The fundamental grade is assigned on a five-point scale from grade 5 (indicating Excellent fundamentals) to grade 1 (Poor fundamentals) The valuation grade is assigned on a fivepoint scale from grade 5 (indicating strong upside from the current market price (CMP)) to grade 1 (strong downside from the CMP).

CRISIL Fundamental Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Excellent fundamentals Superior fundamentals Good fundamentals Moderate fundamentals Poor fundamentals

CRISIL Valuation Grade

5/5 4/5 3/5 2/5 1/5

Assessment
Strong upside (>25% from CMP) Upside (10-25% from CMP) Align (+-10% from CMP) Downside (negative 10-25% from CMP) Strong downside (<-25% from CMP)

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Analyst Disclosure
Each member of the team involved in the preparation of the grading report, hereby affirms that there exists no conflict of interest that can bias the grading recommendation of the company.

Disclaimer:
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Shriram Transport Finance Company Ltd

Leader in pre-owned commercial vehicle financing
Fundamental Grade Valuation Grade Industry 5/5 (Excellent fundamentals) 4/5 (CMP has upside) Consumer finance

December 18, 2013 Fair Value CMP CFV MATRIX

Excellent Fundamentals 5
Fundamental Grade

726 632

Shriram Transport Finance Company Ltd (Shriram Transport) is Indias leading non -banking financial company (NBFC) with strong competitive advantages in pre-owned commercial vehicle (CV) financing (especially five-12 year old vehicles). A relationship-driven business model, expertise in valuing pre-owned vehicles and deep local knowledge have ranked it as a leader in pre-owned vehicle financing. Shift in focus towards financing newer pre-owned vehicles (two-five year old) and small CVs coupled with increase in rural penetration is expected to boost assets under management (AUM). However, these initiatives will also put pressure on its NIM which could lead to lower RoA/RoE. We initiate coverage on the company with fundamental grade of 5/5 indicating excellent fundamentals. Strong competitive edge and track record in pre-owned CV financing Shriram Transports leadership position in pre-owned CV financing (25% market share) is rooted in its strong customer relationships, expertise and experience in pre-owned CV valuation and strong local intelligence. Given that it lends primarily to small road transport operators (SRTOs) and first-time users (FTUs), who have low credit profile and may not have a number of necessary documents, these expertise gain significance. The companys AUM has recorded strong 35% CAGR over the past decade while maintaining credit costs at manageable levels. Rural initiatives and newer products/business to drive growth The company is increasing its rural reach to capture the increase in penetration of CVs in rural areas driven by better road infrastructure and higher goods demand due to rising incomes. We expect the rural initiatives and faster growth in financing of newer segments such as small CVs, tractors, passenger vehicles and construction equipment to drive AUM growth. CRISIL Research expects Shriram Transports AUM to grow at 16% CAGR over FY13-15 to 706 bn. Focus on new vehicles, rural push to affect NIM/RoE While Shriram Transport is a dominant player in five-12 year old CV financing, it faces competition from other NBFCs and banks in the two-five year old CV financing segment which also has lower yields. Segments such as small commercial vehicles (SCVs) and tractors, where it plans to focus, also have lower LTVs, resulting in higher operating costs. Its rural initiatives may also put pressure on operating costs. The companys NIM moderated from 8.4% in FY11 to 7.4% in FY13. We expect NIM to stabilise at 7.0-7.1% and RoE at 18.218.3% Regulatory norms are a monitorable The notification of 90+ dpd NPA classification norms (currently 180+ dpd) will increase the provisioning requirement for Shriram Transport. Further changes in regulatory norms are a monitorable. Valuations: Fair value of 726 per share We have valued Shriram Transport at 1.5x P/B multiple. Our fair value is 726 per share. At the current market price of 632, our valuation grade is 4/5.

4
3

2 1

Poor Fundamentals

Valuation Grade
Strong Downside
Strong Upside
19.1% 5.3% 18.8% 5.5% 49.7% 49.7% 25.8% 25.9%

KEY STOCK STATISTICS

NIFTY/SENSEX 6,217/20,860 SRTRANSFIN/ NSE/BSE ticker STFC Face value ( per share) 10 Shares outstanding (mn) 227 Market cap ( bn)/(US$ bn) 143 / 2 52-week range ()/(H/L) 843/464 Beta 0.9 Free float (%) 74% Avg daily volumes (30-days) 348,956 Avg daily value (30-days) ( mn) 205 NIFTY/SENSEX 6,217/20,860

SHAREHOLDING PATTERN
100% 90% 80% 70% 60% 50% 40% 30% 20% 10%
25.8% 25.8% 49.7% 49.5% 19.1% 5.3% 19.7% 5.1%

0%
Dec-12 Mar-13 FII June-13 DII Sep-13 Others

KEY FORECAST
( mn) Total operating income Pre-provision profit Adjusted net profit Adj EPS () Adj. BV ( per share) P/E (x) P/ABV (x) RoA (%) RoE (%) Credit costs (%) Capital adequacy ratio (%) FY11 30,784 23,016 11,512 51 211 12.4 3.0 4.0% 26.6% 1.6% 24.9% FY12 35,108 26,538 12,181 54 260 11.7 2.4 3.7% 22.5% 1.9% 22.3% FY13 37,854 29,140 13,256 58 310 10.8 2.0 3.2% 19.9% 1.8% 20.8% FY14E 42,523 32,506 14,471 64 365 9.9 1.7 2.9% 18.2% 1.9% 20.6% FY15E 49,870 37,957 17,085 75 427 8.4 1.5 2.9% 18.3% 1.9% 20.6%

Promoter

PERFORMANCE VIS--VIS MARKET

1-m 10% 2% Returns 3-m 6-m 10% -19% 7% 4% 12-m -15% 1%

Shriram Transport CNX 500

ANALYTICAL CONTACT
Mohit Modi (Director) Ankit Hakhu Vishal Rampuria Client servicing desk +91 22 3342 3561 clientservicing@crisil.com mohit.modi@crisil.com ankit.hakhu@crisil.com vishal.rampuria@crisil.com

Source: Company, CRISIL Research

For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI <go>) and Thomson Reuters.

CRISIL IERIndependentEquityResearch

Table 1: Shriram Transport - Business environment

Used commercial vehicle financing Products offerings/market segmentation AUM (FY11) ( bn) AUM (FY13) ( bn) AUM (FY15E) ( bn) AUM growth CAGR FY11-13 AUM growth CAGR FY13-15 Typical LTVs Typical yields Competitors Financing of used vehicles mainly aged between five and 12 years Catering to driver-turned-operators (DTOs) and SRTOs Financing of tyres, ancillary equipment 273 398 550 20.9% 17.5% 50-60% two-five years : 15%-16% five-12 years : 18%-24% Key growth drivers Growth in used vehicle population Gain in market share from unorganised players Increase in vehicle prices and LTVs five-12 years: Unorganised players two-five years : Indus Ind Bank, Cholamandalam, Magma Fincorp Private sector banks: Indus Ind Bank, HDFC Bank, ICICI Bank NBFCs: Sundaram Finance, Cholamandalam Finance, Magma Fincorp Captive financer: Tata Motors Commercial Vehicle Finance, Mahindra Finance Source: Company, CRISIL Research NBFCs: L&T Finance, Magma Fincorp, SREI Infrastructure 88 95 106 3.9% 5.7% 70-75% 14-16% Growth in sales of new CVs, which in turn is linked to macro-economic factors 6.3 30 43 119% 18.7% 80% 16-18% Growth in the construction sector New commercial vehicle financing Mostly finances new vehicle buying by existing customers Construction Equipment Financing of new and preowned commercial equipment viz. forklifts, cranes, loaders

Shriram Transport Finance Company Ltd

Grading Rationale
Leading financer in pre-owned CV financing market
With AUM of 527 bn, Shriram Transport is a leading asset financing NBFC. The company has created a niche for itself in financing pre-owned CVs (76% of AUM as on March 31, 2013). It has around 25% share (as per the management) in the pre-owned CV financing market which is mostly dominated by unorganised private financers. It primarily finances FTUs and SRTOs who have low access to normal banking channels due to lack of credit history and inadequate documentation availability (such as tax returns and bank statements). The company has recorded high growth in this segment - AUM CAGR of 35% over FY03-13) while managing its asset quality. CRISIL expects the company to be able to maintain its leading position in the pre-owned CV financing market owing to competitive advantages such as: Expertise in valuation of pre-owned vehicles Strong relationships with its customers Local intelligence and knowledge
100 200 300 ( bn) 400 500 600

Indias leading asset financing NBFC

Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance 176 190 162 238 158 171 175 527

Cholamandalam Finance
Magma Fincorp

Source: Company, CRISIL Research

The company also finances new CVs but largely caters to existing customers who want to upgrade to new vehicles. It has 5-7% market share in this segment which is dominated by private sector banks and NBFCs. The company has recently (FY10) started construction equipment financing through its wholly owned subsidiary. It has also started providing services for buying-selling pre-owned vehicles (through its wholly owned subsidiary), tyre financing, bill discounting and other related services. While we expect these segments to aid growth, the focus of the company will remain on pre-owned CV financing where it is a dominant player and has strong competitive advantage.

Only large player in this unorganised market

The pre-owned CV financing market is largely unorganised; Shriram Transportis the only large player in this segment. While other NBFCs and banks have a small presence, they mostly finance newer pre-owned CVs (two-five year olds). The high risk nature of this segment has largely kept the organised players away from this market. The risks of catering to this segment arise from the following: a) Inability to track financial position of borrowers: Since most of the customers are not entrenched in the financial system (lack of income tax statement, bank statements) the ability to track their financial health and existing leverage is difficult. As a result, the hypothecated vehicle is the only collateral available. b) Ability to value pre-owned vehicles: Value of pre-owned vehicles is determined by multiple factors such as model, vintage, plying route, wear and tear, accessories, etc. Further, difficulty in valuation increases as the vehicle ages. Valuation is critical in determination of LTVs. c) Mobility of borrowers: Since the borrower and the collateral (vehicle) are highly mobile, tracking of the same and repossession may become an issue.
Unorganise d f inancers 70% Other organised f inancers 8% Shriram Transport 22%

Source: Company

CRISIL IERIndependentEquityResearch

d)

Repayment dependent on income generation: Various local and macro factors may affect revenue generation from the financed vehicle which can impact the repayment of loans.

Figure 1: Pre-owned CVS - operating and financing dynamics

Age of CV=> 0-5 years 5-9 years 9-12 years >12 years

Typical route of

Long haul

Medium Haul

Short Haul

Last Haul
Local Transportation

plying

National Highway

Interstate Transport

Intercity Transport

Typical plying
distance

>800 KMS

350-800 KM

50-350 KM

<50 KM

High to moderate

Moderate-to-low competition No competition

Competition
in Financing

competition

(HDFC Bank, Indus

Ind bank, ICICI Bank, Cholamandal

(Shriram
Transport, Magma Fincorp, Cholamand

(Shriram Transport and private

f inancers)

Finance Not

Available

am, Sundaram, Mag

alam)

Typical yields on Financing

13-16%

18-24%

NA

Financing market Size and

% breakup

920 bn (38%)

750 bn (42%)

180bn (20%)

Source: Company, CRISIL Research

With strong valuation expertise

As mentioned, since pre-owned CVs are generally used by customers with a weak credit profile, the hypothecated vehicle is the only collateral available with the financer. As a result, valuation of the vehicle and determination of LTVs are critical to ensure recovery of loan in case of default. Shriram Transports ability to value pre-owned vehicles gives it a competitive advantage over other organised players and its access to low-cost funds helps it effectively compete with unorganised players. The companys ability to value pre -owned vehicles is rooted in: Vast experience and track record in financing of pre-owned vehicles which has helped it developed strong understanding, experience and knowledge of vehicle valuation.

Age-wise mix of goods M&HCV (ex-Tippers) in India

100% 10% 8% 8% Shriram's core segment 60% 26%

80%

40%

19% 19% 10%

Venturing into this segment

20%

0%

Caters only to existing customers in this segment 1-2 years 3-5 years 6-9 years

New vehicles

Source: Company, CRISIL Research

Shriram Transport Finance Company Ltd

The automall which acts as a platform for buying and selling used CVs via auctions, and helps the company in understanding market valuation for pre-owned vehicles.

Our industry checks indicate that the valuation of pre-owned CVs becomes more complex as the vehicles age. While other NBFCs and banks have been able to gain knowledge in financing two-five year old CVs, they still lack the ability to value older vehicles. Shriram Transport has strong expertise especially in five-year+ old vehicles.

and a relationship-driven business model which ensures repeat business, monitoring of assets
Shriram Transport has developed strong relationships and customer base within the truck community. The company operates on a relationship-based model. Each product executive is assigned 100-150 customers. He takes care of credit assessment, collections and caters to their future needs. He caters to all the financing needs of truck operators such as tyre financing, credit cards for diesel and bills discounting, which not only generates additional business for Shriram Transport but also helps keep a check on overall leverage of the borrower. He handholds the customers in times of distress and allows them to carry out part payment of EMI in case of shortfall of cash flows. Two of Shriram Transports existing borrowers are required to give guarantee for a new borrower/customer. These practices help the company develop strong customer loyalty. Nearly 20% of its yearly disbursements are to the existing customers. The company has developed strong base of over 1.0 mn (as of June 2013) customers which helps it generate repeat business. The company has linked the performance incentives of product executives to the collections which enables it in managing asset quality. Such business model is also prone to scalability issues; however Shriram Transport has been able to manage the same.

Product executive establishes strong relationship with the customers and is responsible for credit assessment, collections, business sourcing for the customers

Tie-up with private financers helps in business sourcing and generates local intelligence
Shriram has entered into partnership and co-financing arrangement with over 500 private financers. Under this agreement, the partner helps in sourcing of business and prepares all the necessary documentations for loan approval and disbursement. Incomes (net of funding costs) as well as losses, if any, are shared between the company and the partner in same proportion. These tie-ups help the company gain and leverage local intelligence and personnel base of the partner/private financer.

Demonstrated track record of growth while managing asset quality

Since Shriram Transport started operations in 1979, it has developed strong expertise in lending against pre-owned CVs to borrowers with weak credit profile. The companys loan book has grown at strong 10-year CAGR of 35% to 527bn in FY13. Growth has largely been driven by the pre-owned vehicle segment. Also, passenger vehicles, small CVs and three

CRISIL IERIndependentEquityResearch

wheelers have aided its growth over the past four-five years. While the company operates in a relatively high risk segment it has been able to manage its NPAs and credit costs well.

Figure 2: Strong growth in AUM over past decade

( bn) 600 500 421 400 292 300 196 200 121 100 0 27 35 54 74 233 527

Figure 3: while managing NPAs and credit costs

(%)
3.5 3.0

368

2.5
2.0

1.5
1.0 0.5 0.0

FY04

FY05

FY07

FY08

FY10

FY11

FY03

FY04

FY05

FY06

FY07

FY09

FY10

FY12

FY13

FY08

FY11

Gross NPA (%)

Net NPA (%)

Credit costs

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Figure 4: Expansion in branch network and employee base

(Nos) 18,000
16,000 14,000 539

Figure 5:Has managed cost efficiency

( mn)
1,200 1,000 800 1.50% 600 1.00% 1.83% 1.81% 2.35% 2.17% 1.84% 2.00% 2.50%

(Nos) 550
540 530 520 502 484 510 500 490

12,000
10,000 8,000 479

488

6,000
4,000 2,000 12,196 FY09 13,817 FY10 16,919 FY11 15,057 FY12 16,178 FY13

480
470 460 450

400
200 487 FY09 FY10 FY11 FY12 FY13 AUM per branch 602 754 839 978 0.00% Opex-to-average AUM (RHS) 0.50%

0 Employees Branches (RHS)

440

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Strong RoA and RoE profile compared to peers

Shriram Transport has one of the highest RoAs in the industry. Given that it operates in a relatively riskier segment, it has high NIM and credit costs. However, credit costs in recent years have also been affected by specific issues - such as ban on mining activity which has affected Shriram Transport more than other players. However, the company has one of the best opex-to-average asset ratios due to a) its partnership with private financers, b) multiple responsibilities (such as origination, credit assessment, collection) being handled by a single professional for customers and c) branch location in trucking hubs and off-city locations which have low costs. These factors have resulted in it having high RoAs as compared to its peers.

FY13

FY03

FY06

FY09

FY12

Shriram Transport Finance Company Ltd

Dupont analysis
Figure 6: Total income-to-average assets
Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance Cholamandalam Finance Magma Fincorp 0.0% 10.0% 13.2% 20.2% 17.2% 17.7% 15.5% 16.2% 16.3% 20.0% 30.0% 21.4%

Figure 7: Opex-to-average assets

Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance Cholamandalam Finance Magma Fincorp 0.0% 2.0% 4.0% 2.1% 3.4% 2.8% 3.6% 4.6% 6.0% 1.6% 5.5% 4.3%

*Net of interest costs Source: Company, CRISIL Research

Source: Company, CRISIL Research

Figure 8: Provision & write-offs to average assets

Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance Cholamandalam Finance Magma Fincorp 0.0% 0.5% 0.8% 0.9% 1.0% 2.0% 3.0% 1.3% 0.0% 1.2% 2.1% 2.7%

Figure 9: RoAs
Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance Cholamandalam Finance Magma Fincorp 0.0% 1.9% 1.2% 2.0% 4.0% 6.0% 3.0% 3.1% 2.5% 3.8% 3.2% 3.9%

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Figure 10: Leverage

Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance Cholamandalam Finance Magma Fincorp 2.0 4.0 6.0 3.9 4.3 4.2 5.3 5.7 7.1 8.0 5.7 6.2

Figure 11: RoEs

Shriram City Union Kotak Mahindra Prime Bajaj Finance Shriram Transport Finance Mahindra Finance Sundaram Finance Cholamandalam Finance Magma Fincorp 0.0% 9.6% 10.0% 20.0% 30.0% 22.5% 19.8% 21.9% 20.1% 23.1% 21.2% 18.1%

Source: Company, CRISIL Research *All ratio are based on FY13 standalone financials

Source: Company, CRISIL Research

CRISIL IERIndependentEquityResearch

Rural penetration, newer products / businesses to drive Shriram Transports growth

CRISIL Research expects the new CV sales to continue to decline in FY14. However, Shriram Transports growth will be relatively less impacted due to: Focus on pre-owned CV financing which is relatively stable compared to new CV financing. Increasing focus on the light commercial vehicle (LCV) and SCV segments, this is expected to perform better than the medium and heavy commercial vehicle (M&HCV) segment. Increase in rural penetration through rural centers. Earlier it was mostly present in trucking hubs and on the outskirts of large cities. Newer products/businesses such as tractors, passenger vehicles, construction equipment and automall to drive growth. We expect these strategies to drive Shriram Transports AUM to grow at 16% CAGR over the next two years to 706 bn in FY15. However, rural penetration and financing of small ticket size loan in LCV/SCV may put pressure on the operating costs. Rural penetration strategy: Shriram Transport has around 569 branch offices (as on June 30, 2013) across India. Most of them are present close to trucking hubs in semi-rural areas and outskirts of urban areas. Over the past five-six years, the company has opened over 425 rural centers to increase its penetration in rural areas. A rural centre is a one-man branch attached to a main branch office. These centers help the company gain new customers from rural areas. The company has been converting these rural centers into main branches as they increase in size. We expect the companys focus on rural areas to increase over the past few years as vehicle penetration in these areas increases. There are more vehicles in rural areas due to a) increase in rural income due to various government schemes and b) better road connectivity. Growth in new products: Shriram Transport has started financing tractors, small CVs, passenger vehicles and construction equipment. CRISIL expects these products to grow at a faster pace than Shriram Transports conventional truck financing business. New LCVs and SCVs have grown at a significantly faster pace than new M&HCVs over the past five years. These vehicles have now started seeing change of ownership. This will lead to increased presence of LCVs and SCVs in the pre-owned vehicle market providing financing opportunity for players such as Shriram Transport.

Given increased penetration of CVs in rural markets, Shriram Transport has increased focus on rural markets.

Despite overall slowdown in CV

Tractor financing is expected to witness strong growth in FY14 as good monsoons are expected to lead to better tractor sales.

industry, segments such as tractors, LCVS, SCVs are expected to perform better.

The companys wholly owned subsidiary Shriram Construction Equipment Ltd started financing construction equipment in FY11. The company primarily caters to first-time borrowers/single machine owner in construction equipment for which the demand is relatively resilient. We expect its AUM to grow at 19% CAGR over FY13-15 due to low base and slower repayments despite weak economic outlook.

Shriram Transport Finance Company Ltd

Figure 12: New LCV sales grew faster than MHCVs

600,000 500,000 400,000

Figure 13: Tractor financing to do well given good monsoon

20% 17% 15%

10% 300,000 524,622 200,000 100,000 FY08 LCV FY13 M&HCV -5% FY13 FY14E 215,958 274,203 268,533 0% -2% 5%

8%

FY13-16

Source: CRISIL Research

Source: CRISIL Research

Figure 14: Construction equipment AUM to log good growth

( mn) 45,000
40,000 35,000 30,000 25,000 203%

Figure 15: Construction equipment business dynamics

Typical customers Type of equipment financed Average loan tenure First-time users, operator turned owners Backhoe loaders, excavators, tippers 39 months 80% 17% 154 (operates out of Shriram Transport's branches) 8-9%

250%

200%

150% 37,198
58% 22% 6,342 FY11 19,234 FY12 AUM 30,412 0% FY13 FY14E FY15E 14% 50%

Average LTVs Average yields Number of branches

20,000
15,000 10,000 5,000 -

42,338

100%

Market shares (as per management)

y-o-y (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Even though CV industry is witnessing prolonged slowdown

CRISIL Research has recently lowered its GDP expectation to 4.8% for FY14. Lower GDP and industrial growth is expected to impact freight availability demand and rise in diesel prices will impact profitability of transporters. We expect the overall new CV sales to decline by 911% in FY14 after posting a 2% decline in FY13. The M&HCV segment is expected to be hit hard and is expected to decline by 10-15% in FY14 on the back of 26% decline in FY13. Lower GDP is expected to lead to sluggish 3-6% growth in road freight demand (measured in BTKM).

CRISIL IERIndependentEquityResearch

Figure 16: New CVs to witness second consecutive year of decline

20% 15% 10% 5% -1% to 1% 0% -5% -10% -15% -20% -25% -30% FY13 LCVs M&HCVs Buses FY14E Overall CVs -26% -2% -8% to -10% -10% to -15% 16%

-4%

-9% to -11%

Source: CRISIL Research

Automall: Shift from supporting the financing business to becoming standalone entity
Through wholly owned subsidiary Shriram Automall India Ltd (Shriram Automall), Shriram Transport operates 24 auto malls across India. The auto malls provide a buying and selling platform for pre-owned CVs. The vehicles are sold through physical auction, online auction or through one-stop kiosk present across Shriram Transports branches. The auto malls generate income through various services such as transaction charges, parking charges and valuation services. They provide the following benefits: A transparent platform for buying and selling vehicles, thus helping in price discovery of pre-owned vehicles. These inputs will boost Shriram Transports knowledge on current valuations of pre-owned vehicles. It helps in business generation. Nearly 30% of Shriram Transports disbursements (by volume) are to borrowers who would have bought vehicles through the auto malls. Shriram Automall is now expanding its business which is expected to drive Shriram Transports growth. While it initially focused on selling vehicles repossessed by Shriram Transport, it has now tied up with other banks and NBFCs for sale of their repossessed stock. It is also entering into sales of other pre-owned vehicles including cars, MUVs, passenger vehicles, etc.

Tied-up with leading banks and NBFCs for sale of their repossessed stocks.

Shift toward newer vehicles to impact NIM

CRISIL Research believes Shriram Transport has been caught in a growth vs. profitability conundrum. While its AUM has grown over the past three-four years, increasing AUM share of newer vehicles and rural push is leading to pressure on yields and spreads. Shriram Transport has strong competitive advantages in its traditional segment (financing of five-12 year old vehicles) and virtually has no competition from organised players. However, banks and NBFCs are present in the two-five year old category, with whom Shriram Transport will have

10

Shriram Transport Finance Company Ltd

to compete. As a result, we expect NIM to continue to be under pressure. We expect NIM and RoA to stabilise at 7.1% and 2.9%, respectively, in FY15.

Focus on capturing emerging opportunity in newer vehicles

Over the past two years, Shriram has started focusing on two-five year old pre-owned vehicles as compared to its earlier strategy of focusing on five-12 year old pre-owned vehicles. As per the management, this shift in on account of emerging opportunity in this segment driven by: Increase in diesel prices are making older vehicles with lower mileage less remunerative leading to increase in demand for newer vehicles. Weak environment and fall in prices of vehicles are leading to buyers preferring to buy an older vehicle as compared to a brand new vehicle. Increasing share of LCVs and SCVs in the overall pre-owned market, most which are changing owners for the first time.

Shift in focus towards newer vintage vehicle (2-5 year) driven by shift in market dynamics).

Two-five year old segment characterised by high LTVs, low yields and high competition
The increased focus on two-five year old vehicles has led to faster growth in AUM as these vehicles have higher values as well as higher LTVs. However, the competition in this segment is higher due to the presence of other organised players. NBFC such as Cholamandalam Finance, Magma Fincorp are already present in this segment though their presence is lower than that of Shriram Transport. Few of the private sector banks also cater to this segment. CRISIL Research believes that Shriram Transports edge due to its valuation ability is mo re pronounced in this segment. Higher competition and better earning potential of these vehicles leads to relatively lower risks and hence lower yields in this segment. Nevertheless since the profile of the customer in this segment remains similar to that in five-to-12 year old segment it is still has some risks.

Figure 17: Two-five year old segment less lucrative

70%

60-70%
50-60%

60%
50% 40% 30%

18-24% 20% 10% 0% LTVs 2-5 years Yield 5-12 years 14-16%

Source: CRISIL Research

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CRISIL IERIndependentEquityResearch

Weak macro-economic environment to impact asset quality

Shriram Transports asset quality has been under pressure for the past two -three years given the sharp downturn in economic activity which is affecting freight demand for its customers. Further, certain specific factors such as mining ban in few southern states have also affected the asset quality. Given the weak financial profile of its customers and their dependence on the vehicle for earning livelihood, Shriram has to closely work with its customers allowing partrepayment in challenging economic conditions. As a result, the 180+ dpd as well as gross NPAs have risen sharply over past few years. However, the eventual write-offs have remained manageable. CRISIL Research expects the economic activity to remain subdued over FY14 leading to lower freight availability and freight rates. Further, the increase in diesel prices may put pressure on profitability of SRTOs and DTOs.

Figure 19: Gross NPA as a percentage of on book assets Figure 18: 180+ dpd delinquencies on rise
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY09 FY10 Pre-owned vehicles FY11 FY12 FY13 1.3 1.3 1.4 1.2 2.0 2.1 1.9 2.2 2.8 3.0% 2.5% 2.0% 1.5% 1.6% 1.0% 0.5% 0.0% FY09 FY10 FY11 FY12 FY13 FY14E FY15E Provision Coverage (RHS) 1.3% 1.6% 2.1% 62% 1.9% 1.8% 1.9% 1.9% 3.0

and credit cost trends

3.5% 2.8% 3.3% 86% 86% 3.1% 3.3% 100% 90% 80% 2.9% 75% 2.6% 76% 76% 76% 70% 60% 50% 40% 30% 20% 10% 0%

New vehicles

Gross NPA

Credit costs

Source: Company, CRISIL Research

Source: Company, CRISIL Research

RoA/RoE to be below historical levels but still attractive

CRISIL Research estimates Shriram Transports RoA/RoE at 2.9%/ 18% over FY14 -15; lower than its past five-year average of 3.6%/24.3% respectively. The shift towards lower yield, newer assets, pressure on opex costs due to higher rural push and small ticket size, and increase in credit costs due to weak economic environment will lead to moderation in RoA/RoE. Nevertheless, we believe these will still be attractive.

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Shriram Transport Finance Company Ltd

Figure 20: NIM on AUM

9.0% 8.4% 8.5% 8.0% 8.0% 7.5% 7.0% 6.5% 7.7% 7.4% 7.1% 7.0%

Figure 21: RoA and RoE

30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 3.4% 4.0% 3.7% 3.2% 2.9% 2.9% 28.0% 26.6% 22.5% 19.9% 18.2% 18.3%

6.0% FY10 FY11 FY12 FY13 FY14E FY15E

FY10

FY11 RoA

FY12

FY13

FY14E RoE

FY15E

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Diversifying funding mix

The company has been diversifying its funding profile though securitisation remains a dominant component accounting for 35% of the companys liabilities. The new securitisation guidelines have also impacted the securitisation done by company and we expect the share of securitisation in overall liability mix to decrease (from 35% in FY13 to 29% in FY15) which may lead to upward pressure on borrowing costs. While the company has been tapping retail investors through fixed deposits and public issues of NCDs, the share of retail liabilities remains low at around 11%. The company enjoys credit rating of CRISIL AA/Stable and CARE AA+/Stable which helps it in raising funds at competitive rates.

Figure 22: Borrowing mix by source of financing

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY09 Retail FY10 FY11 FY12 FY13 21% 12% 11% 12% 12% 11% 37% 44% 43% 35% 52% 67% 44% 45% 54%

Figure 23: Borrowing mix by type of instrument

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 19% 6% FY09 16% 7% FY10 NCDs Others 13% 9% FY11 20% 8% FY12 28% 7% FY13 36% 19% 0.02% 5% 0.38% 34% 3% 3% 28% 8% 3% 18% 21% 37% 44% 43% 35% 5% 3% 22%

Securitisation

Other Institutional

Subordinated debts Fixed deposits

Term Loans Securitisation

Source: Company, CRISIL Research

Source: Company, CRISIL Research

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Figure 24:Cost of funds on a decline

12.0% 11.6% 11.5% 11.6% 11.4% 11.8%

Figure 25: Comparison of borrowing costs

Shriram City Union Kotak Mahindra Prime Bajaj Finance 9.5% 10.3% 10.6% 9.9% 10.2% 14.1% 11.5% 5.0% 10.0% 15.0% 12.6%

11.0% 10.5% 10.5%

Shriram Transport Finance Mahindra Finance Sundaram Finance

10.0%

Cholamandalam Finance Magma Fincorp FY09 FY10 FY11 FY12 FY13 0.0%

9.5%

Source: Company, CRISIL Research

Source: Company, CRISIL Research

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Shriram Transport Finance Company Ltd

Key Risks
Concentrated in single sector
Shriram Transport is present in only CV finance. The CV industry is cyclical and competition in the CV finance industry has intensified. Further, the current outlook on the CV financing industry remains challenging even though pre-owned CV financing is relatively stable. The company lends to risky borrowers who depend on their CV for generating income and may not have other sources of income to meet the repayment obligation. While the company has managed its risks well, it has in the past been affected by sector-specific issues such as ban on mining activity in southern states.

Regulatory changes may impact profitability

The Reserve Bank of India (RBI) has been focusing on tightening prudential norms for NBFCs to bring them at par with the banking industry. As a result, the playing field between banks and NBFCs is getting leveled leading to increased competition as well as lower profitability for NBFCs.

New norms impacted securitisation in FY13

The RBI recently released new securitisation guidelines which seek to discourage assignment transactions in favour of PTC (pass through certificate). The same has resulted in the PTC route being preferred for securitisation. However, under the PTC route the exposure to securitised assets is included in risk-weighted assets, thus reducing the capital adequacy ratios. Further, the cap on difference between base rate and yield on securitised assets (currently at 8%) has resulted in inability to securitise high yield assets. These regulations have impacted the quantum of assets securitised (as % of AUM) as well as capital adequacy ratios.

Notification of 90+ dpd NPA classification norms may impact profitability

The Usha Thorat Committee has recommended that NBFCs will have to move to 90+ dpd NPA classification norms from current 180+ days. Given Shriram Transports business model, CRISIL Research believes that it will be difficult for it to contain its 90+ dpd delinquencies. Any effort towards the same could result in loss of customers to banks. In case these norms get notified, the higher provisioning requirement may impact profitability.

Migration to 90+ dpd NPA classification norm a key monitorable.

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Financial Outlook
AUM to grow at 16% CAGR over FY13-15
CRISIL Research expects Shriram Transports AUM to record 16% CAGR over FY13-15 notwithstanding the macro-economic concerns. Increase in rural penetration combined with growth in newer vehicle segments such as tractors, SCVs and construction equipment will continue to drive the growth. We expect the new CV portfolio to post 6% CAGR over FY13-15 owing to challenges in new vehicle sales. However, the pre-owned vehicle portfolio is expected to witness a strong 18% CAGR and will continue to dominate its AUM. We expect the share of two-five year old vehicles in the pre-owned portfolio to grow faster than the five12 year old vehicles.

AUMs to grow at 16% CAGR over FY13-FY15 on the back of increase in rural penetration, combined with growth in newer vehicle segments such as tractors, SCVs and construction equipment.

Figure 26: AUM on strong growth track

( bn) 800 700 600 500 400 300 200 100 FY11 FY12 AUM FY13 FY14E FY15E 5.0% 368 421 527 604 706 0.0% 14.5% 16.9% 14.5% 15.0% 10.0% 20.0% 26.3% 30.0% 25.1% 25.0%

Figure 27: Pre-owned vehicles to continue to dominate

100% 95% 90% 85% 80% 75% 70% 65% 60% 55% 50% FY11 Pre-owned FY12 New FY13 FY14E FY15E Others 74% 74% 76% 76% 78% 24% 22% 18% 16% 15% 2% 1% 5% 6% 1% 6% 1% 6%

Growth (RHS)

Construction equipment

Source: Company, CRISIL Research

Source: Company, CRISIL Research

NIM to moderate; opex to remain stable

CRISIL Research believes that because Shriram Transport is moving from its traditional markets (five-12 year old pre-owned vehicles) to new segments such as newer (two-five year old) pre-owned vehicles, construction equipment, SCVs and tractors - which have higher competitive intensity - NIMs have been under pressure and are expected to remain so in FY14. Further, the increase in borrowing costs due to recent monetary tightening will also impact NIM. We expect NIM to reach 7.0% in FY14 and 7.1% in FY15. Fee income is expected to grow at 20% CAGR over FY13-15 primarily driven by growth in the Automall subsidiary. Operating income is expected to grow at 15% CAGR to 49.8 bn in FY15. We expect the rural push combined with lower ticket sizes on LCVs/SCVs to put pressure on the operating costs. However, the same is expected to be offset by higher ticket sizes on newer vehicles and improvement in operating efficiencies. As a result, we expect opex cost to remain stable at 1.8-1.9% over FY13-15. CRISIL Research expects pre-provision profit to grow at 14% CAGR over FY13-15 to 37.9 bn in FY15.

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Shriram Transport Finance Company Ltd

Figure 29:Operating income to grow at 15% CAGR over Figure 28:NIMs to moderate
9.0% 8.4% 8.5% 8.0% 8.0% 7.5% 7.0% 6.5%
40,000

FY13-15
( mn) 60,000 50,000 39.8% 45% 40% 35% 30% 25% 17.3% 14.0% 20,000 10,000 30,784 FY11 35,108 FY12 37,854 FY13 42,523 FY14E 49,870 FY15E Growth (RHS) 7.8% 12.3% 20% 15% 10% 5% 0%

7.4% 7.1% 7.0%

30,000

6.0% FY11 FY12 FY13 FY14E FY15E

Total Operating income

Source: Company, CRISIL Research

Source: Company, CRISIL Research

Figure 30: Operating income break-down

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY11 Net interest income FY12 FY13 FY14E FY15E 46% 37% 48% 60% 69% 51% 49% 60% 37% 28% 3% 3% 2% 3% 3%

Figure 31: Opex costs to remain stable

3.0% 2.4% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% FY11 FY12 FY13 FY14E FY15E 2.2% 1.9% 1.8% 1.9%

Securitisation income

Fee and other income

Source: Company, CRISIL Research

Source: Company, CRISIL Research

NPAs to increase owing to weak environment

Given the weak economic outlook, we expect the transport sector to remain under pressure raising NPAs from 3.1% in FY13 to ~3.3% in FY15. However, given Shriram Transports strong relationships with its customers, we expect the eventual write-offs to be manageable. The overall credit costs are expected to increase from 1.8% in FY13 to 1.9% in FY15.

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Figure 32: Gross NPA to rise; credit cost to remain manageable

3.5% 3.0% 2.5% 2.0% 1.5% 1.6% 1.0% 0.5% 0.0% FY09 FY10 FY11 FY12 FY13 FY14E FY15E 1.3%
1.6%

3.3% 86% 2.8% 2.9% 75% 2.6% 1.9% 76% 76% 86% 3.1%

3.3%

100% 90% 80%

2.1% 62%

76%

70% 60% 50%

1.8%

1.9%

1.9%

40% 30% 20% 10% 0%

Gross NPA

Credit costs

Provision Coverage (RHS)

Source: Company, CRISIL Research

Capital adequacy to remain comfortable

We expect the standalone capital adequacy to remain comfortable at 20.6% in FY14-15, well above the regulatory requirement of 15%. Given the strong profitability of the company combined and institutional support, we believe the company will be able to meet its capital requirement in case of faster growth.

Figure 33: Standalone capital adequacy to remain comfortable

30.0%

24.9%
25.0% 20.0% 15.0% 10.0% 16.7% 5.0% 0.0% FY11 FY12
Tier I

22.3%
8.2% 5.0%

20.8%
4.1%

20.6%
3.8%

20.6%
3.7%

17.3%

16.7%

16.8%

16.9%

FY13

FY14E
Tier II

FY15E

Source: Company, CRISIL Research

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Shriram Transport Finance Company Ltd

Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.

Highly experienced professional management

The top management boasts strong domain knowledge and vast experience. They have been associated with the company for a long time and have an established track record growing the business. The top management is supported by a highly qualified and experienced second line. The board of directors comprises highly experienced professional from varied disciplines. Since the company functions under the umbrella of Shriram group, it enjoys strong support from the group in terms of organisational culture and availability of management resources.

Most of the key management

Mr Umesh Revankar, with the company for around 24 years, took over as managing director from Mr R Sridhar in July 2012. He was previously in charge of operations.

team has been with the company for over a decade.

Strong second line management and a culture of empowerment

The company has a strong second line of management with professionals for various key roles such as CFO, COO etc. Most of the personnel have been with the company for more than decade and have strong expertise in their respective areas. Further, the decision making is decentralised at various business levels, which enables quick disbursements. This not only results in better relationship with the customers but also strong cultural empowerment within the company. The product executive handles the relationship with customers and takes care of assessment, disbursement and collection for the customer.

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Corporate Governance
CRISILs fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a companys corporate governance. Overall, corporate governance at Shriram Transport meets the statutory requirement supported by reasonably good board practices and involvement of an independent board

Board composition
Shriram Citys board consists of 10 members, of who five are independent directors, which is in line with the requirements under Clause 49 of SEBIs listing guid elines. The board has diverse experience in areas of finance, law and audit. We believe they have a fairly good understanding of the companys business and its processes, and their participation in board meetings is good. Shriram Transports chairman, Mr A run Duggal, an experienced international banker, is also chairman of Shriram City Union Finance and Shriram EPC Ltd. He has been associated with the Shriram group since November 2003.

Corporate governance practises meets statutory requirement

Boards processes
The boards processes are well organised with all the necessary committees - audit, remuneration, investor grievance, financial results review, asset liability and management - in place to ensure good corporate governance practices. The audit committee is chaired by an independent director, Mr M.S.Verma who retired as Chairman of State Bank of India in 1998. The audit committee consist of two other independent and one nominee director. Other independent directors include Mr. Sumatiprasad Bafna, Mr. Puneet Bhatia, Mr. S. Lakshminarayanan, Mr. Amitabh Chaudhry and Mrs. Kishori Udeshi. The companys independent directors have diverse background viz., finance, automobile, policy etc and are leading professionals in their respective fields.

Related party transactions

The company paid 964 mn towards royalty, data sourcing and service charges to its related parties (promoter and promoter group companies), which is 22% of its operating costs (excluding employee costs). The management has indicated that the company receives services from its promoter group/companies towards branding, legal and regulatory needs. The related party expenses are towards meeting these costs. These are done at arm-length.

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Shriram Transport Finance Company Ltd

Valuation

Grade: 4/5
Fair value of 726

We have valued Shriram Transport by the P/B method. We have assigned a P/B multiple of 1.7x FY15E adjusted book value per share of 427 to arrive at a fair value of 726. At the current market price of 632, our valuation grade is 4/5 indicating market price has upside from the current levels. Shriram has traded at median multiples of 1.7x over past 10 years and 1.9x over past five years. Our assigned multiple is at a discount to the five-year median multiple enjoyed by the company as we believe the RoA and RoE profile of the company will be lower as compared to that witnessed over the past five years. The shift towards newer assets will impact its NIM and the weak economic environment will impact the credit costs leading to lower RoA/RoE over the next two years. Our assigned multiple of 1.7x is at a premium to the median forward multiple enjoyed by the asset financing peers as well as median multiple of private sector banks. The leading position of Shriram Transport among asset financing NBFCs justifies the premium over other NBFCs whereas the superior RoA/RoE profile (over median) justifies the premium over private sector banks.

One-year forward P/B band

()
1,400 1,200 1,000

One-year forward P/B movement

(Times) 4.0 3.5 3.0 2.5 2.0 +1 std dev

800
600 400

1.5 1.0 0.5 0.0

200
0

-1 std dev
Oct-04 Dec-01 Nov-06 Oct-11 May-03
May-10

Dec-01

Nov-06

Dec-13

Dec-08

May-03

May-10

Aug-07

Sep-09

Aug-02

Shriram Transport

1x

1.5x

2x

3x

1yr Fwd PB (x)

Median PB

Source: NSE, CRISIL Research

Source: NSE, CRISIL Research

Dec-13

Dec-08

Oct-04

Oct-11

Jan-04

Jan-04

Jun-05

Jun-05

Mar-06

Jul-12

Mar-06

Mar-13

Feb-11

Aug-07

Sep-09

Aug-02

Mar-13

Feb-11

Jul-12

Apr-08

Apr-01

Apr-08

Apr-01

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Peer comparison
M.Cap Name of company Rural Electrification Corporation Power Finance Corporation IDFC Infrastructure finance NBFCs M&M Financial services Shriram Transport Bajaj Finance Sundaram Finance Shriram City Union Cholamandalam Investment Magma Fincorp Asset financing NBFCs HDFC LIC Housing Finance Housing finance NBFCs State Bank of India Bank of Baroda Punjab National Bank Canara Bank Union Bank PSU Banks HDFC Bank ICICI Bank Axis Bank Kotak Mahindra Bank IndusInd Bank Yes Bank Private Sector Banks Source: Industry, CRISIL Research CMP 211 154 106 312 632 1,495 601 1,065 246 65 798 204 1,763 650 590 259 121 666 1,096 1,283 750 429 376 bn 208 203 161 177 143 74 67 63 35 12 1,245 103 1,206 274 208 115 72 1,595 1,265 602 577 225 135 FY13 1.2 1.0 1.6 1.0 2.4 2.0 1.7 2.0 2.6 2.0 1.1 2.0 4.0 1.7 2.6 1.1 0.9 0.8 0.7 0.8 0.6 4.1 1.8 1.8 3.2 2.8 2.6 1.9 P/B (x) FY14E 1.0 0.7 1.1 0.9 3.2 1.7 1.9 2.1 2.2 1.6 0.8 1.6 4.4 1.4 2.8 0.9 0.8 0.6 0.5 0.4 0.6 3.7 1.7 1.6 3.1 2.6 1.9 1.5 FY15E 0.8 0.6 1.0 0.8 2.8 1.5 1.6 1.8 1.8 1.3 0.7 1.4 3.8 1.2 2.4 0.8 0.7 0.6 0.4 0.4 0.6 3.1 1.6 1.4 2.7 2.3 1.5 1.4 FY13 23.8 19.7 14.1 19.7 24.4 19.9 21.9 23.6 22.4 18.1 10.1 22.1 23.6 17.1 20.4 15.5 15.1 15.7 12.1 13.6 14.5 20.3 13.2 18.5 15.5 17.2 24.8 17.1 RoE (%) FY14E 24.5 20.0 13.7 18.3 21.3 18.2 19.7 23.0 19.7 17.5 12.2 19.8 21.4 18.9 20.3 11.9 13.5 12.5 10.5 11.5 13.0 21.2 13.7 16.7 14.9 16.4 23.2 15.7 FY15E 23.0 19.7 13.7 17.3 21.9 18.3 20.1 22.7 20.2 18.9 14.7 20.5 22.6 19.1 21.1 12.8 14.0 13.9 11.6 12.8 13.7 22.2 14.3 16.8 15.0 17.7 22.7 16.5 FY13 3.2 2.9 2.8 2.9 4.0 3.2 3.8 2.8 3.1 1.9 1.3 3.0 2.9 1.4 2.1 0.9 0.9 1.0 0.7 0.8 0.8 1.8 1.6 1.7 2.1 1.6 1.5 1.8 RoA (%) FY14E 3.3 2.9 2.7 2.7 3.7 2.9 3.7 3.0 3.0 1.8 1.3 3.0 2.3 1.5 2.0 0.7 0.8 0.8 0.6 0.6 0.8 1.9 1.6 1.6 2.1 1.7 1.4 1.7 FY15E 3.1 2.8 2.7 2.7 3.6 2.9 3.7 3.1 3.0 2.0 1.5 3.1 2.3 1.6 2.0 0.8 0.8 0.9 0.6 0.6 0.9 2.0 1.7 1.6 2.2 1.7 1.5 2.2

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Shriram Transport Finance Company Ltd

Company Overview
Incorporated in 1979, Shriram Transport is the flagship company of the Shriram group. It is Indias largest asset financing NBFC with AUM of 537 bn (as on March 2013). Its forte is financing of pre-owned vehicles (76% of the AUM), though it also finances new commercial vehicles. The company has created a niche for itself in financing two-12 year old vehicles for small truck owners or driver-turned-owners. The company was pre-dominantly focused in southern India where nearly 46% of its 539 branches (as on March 31, 2013) are located. However, the company is focussing on expanding its network in non-South regions, especially in central and eastern India. Leveraging its core strength, the company has entered (through wholly owned subsidiaries) financing of construction equipment and has started auto malls, which provide a platform for buying and selling of used vehicles.

Leading financer of pre-owned commercial vehicle.

Shriram Transport corporate structure

Shriram Transport Finance Company Ltd. - Financing of pre-owned and new CVs - AUM of 496.7 bn as on March 31, 2013 - FY13: Revenues: 65.6 bn PAT 13.6 bn

Shriram Equipment Finance Company Ltd. - Financing of construction equipment - AUM of 30.4 bn as on March 31, 2013 - FY13: Revenues: 4.04 bn PAT 2.1bn

Shriram Automall India Ltd - Provides platf orm f or buying and selling of used vehicles - Currently operates 21 automalls across India - FY13: Revenues: 750 mn PAT 140 mn

Source: Company, CRISIL Research

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Region-wise branch break-up

Central 11% North 16%

West 17%

East 10%
South 46%

539 branches as on March 31, 2013 Source: Company, CRISIL Research

Shriram Transports product overview

Shriram Transport product overview

Others

Asset financing

Automall

Used CVs

Co branded credit cards

New CVs

Freight bill discounting

Construction equipment

Tractors
Source: Company, CRISIL Research

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Shriram Transport Finance Company Ltd

Backed by large institutional shareholders

Key shareholders Shriram Capital Ltd Piramal Enterprises Ltd Genesis Indian Investment Company Ltd Ontario Teachers Sanlam Life Insurance Ltd Centaura Investments Stichting Pensioefonds Abp Smallcap World Fund Vanguard Emerging Markets Equinox Partners Schroder International Total As on Sep 30, 2013 Source: Company % stake 25.9 10.0 6.1 5.0 5.0 3.3 1.5 1.2 1.1 1.1 1.0 61.2

Key Milestones
1979 1984 1990 1999 Incorporated Initial public offering Investment from Telco & Ashok Leyland Tied-up with Citicorp for CV financing under portfolio management services Entered first securitisation transaction 2002 2004 2005 2006 Preferential allotment to Citicorp Finance (India) Preferential allotment to Axis Bank and Reliance Capital Investment from Chrys Capital Merger of Shriram Investment Ltd and Shriram Overseas Finance Ltd Investment by TPG 2009 2010 Purchase CV and CE loans of GE Capital Services India and GE Capital Financial Services Raised 5.84 bn through QIP to domestic and international investors Launched its first Automall Source: Company

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Annexure: Financials (Consolidated)

Income Statement
( m n) Net Interest Income Non Interest Income Total Operating Incom e Operating Expenses Staff Costs Other Operating Expenses Pre- provision profit (PPP) Provision & Contingency FY11 29,876 908 30,784 7,768 3,711 4,057 23,016 5,187 FY12 34,028 1,080 35,108 8,569 4,076 4,493 26,538 7,696 18,842 174 907 19,575 6,488 13,088 1 13,088 907 12,181 FY13 36,913 941 37,854 8,714 4,388 4,327 29,140 8,665 20,475 227 1,379 21,627 6,988 14,639 (5) 14,634 1,379 13,256 FY14E 41,400 1,122 42,523 10,016 5,166 4,851 32,506 10,581 21,925 260 587 22,252 7,190 15,062 (5) 15,058 587 14,471 FY15E 48,531 1,340 49,870 11,913 6,361 5,553 37,957 12,192 25,765 267 525 26,023 8,408 17,615 (5) 17,610 525 17,085

Ratios
( m n) Spread Analysis NIM on AUM Cost of borrow ings Return Ratios ROA (%) ROE (%) Grow th ratios AUM Disbursements Net Interest Income Securitisation income Other income Total Operating Income Operating Expenses Pre- provision profit (PPP) Provision & Contingency Adjusted Net Profit EPS () Book Value () 26.3% 39.9% -5.0% 133.1% -8.7% 39.8% 61.0% 33.7% 27.5% 34.8% 34.4% 29.5% 14.5% 2.9% -6.6% 32.1% 71.6% 14.0% 10.9% 15.1% 48.4% 5.8% 5.7% 23.1% 25.1% 38.2% 38.9% -10.6% 89.4% 7.8% 2.3% 9.7% 12.6% 8.8% 8.5% 19.1% 14.5% 1.9% 40.6% -15.5% 20.0% 12.3% 14.9% 11.5% 22.1% 9.2% 9.2% 17.6% 16.9% 21.6% 34.8% -11.1% 20.0% 17.3% 18.5% 16.9% 15.2% 18.1% 18.1% 17.2% 4.0% 26.6% 3.7% 22.5% 3.2% 19.9% 2.9% 18.2% 2.9% 18.3% 8.4% 11.8% 8.0% 11.4% 7.4% 10.5% 7.0% 10.8% 7.1% 10.8% FY11 FY12 FY13 FY14E FY15E

Profit before depreciation and tax 17,829 Depreciation On Fixed Assets Extra-ordinary gain / (loss) PBT Provision for tax PAT Share in assoc. Profits Report PAT after MI Extra-ordinary gain / (loss) Adjusted PAT after MI 113 659 18,375 6,204 12,171 (0) 12,171 659 11,512

Balance sheet
( m n) Total Share Capital Equity share capital Equity Share w arrants Reserves Shareholders Funds Minority Interest Preference capital Borrow ings Other Liabilities & Provisions Deferred tax liability Sources of funds FY11 2,262 2,262 46,288 48,550 206,480 55,557 310,586 FY12 2,263 2,263 57,632 59,896 244,278 51,907 356,080 FY13 2,269 2,269 70,726 72,995 341,409 46,180 460,583 FY14E 2,269 2,269 83,711 85,980 394,376 50,857 531,214 FY15E 2,269 2,269 98,661 100,930 474,316 57,650 632,897

Asset Quality Gross NPA (%) Net NPA (%) Provision & w riteoffs (as % of AUM) Valuation Data P/E (x) P/ABV (x) Key Param eters Loan assets - including off-book ( mn) Disbursements ( mn) Capitalisation ratios (Adjusted) Capital adequacy ratio Tier I capital ratio Tier II capital ratio 24.9% 16.7% 8.2% 22.3% 17.3% 5.0% 20.8% 16.7% 4.1% 20.6% 16.8% 3.8% 20.6% 16.9% 3.7% 368,168 205,401 421,373 211,265 527,172 291,890 603,857 297,421 705,875 361,635 12.4 3.0 11.7 2.4 10.8 2.0 9.9 1.7 8.4 1.5 2.6% 0.4% 1.6% 2.9% 0.4% 1.9% 3.1% 0.8% 1.8% 3.3% 0.8% 1.9% 3.3% 0.8% 1.9%

Cash & Bank Balances Investments Net Loans and advances Net Fixed Assets and Capital WIP Deferred tax asset Other Assets Application of funds

37,642 34,774 194,700 421 1,542 41,509 310,587

53,949 37,590 224,997 501 2,183 36,860 356,080

64,939 38,037 329,146 692 2,871 24,898 460,583

66,410 38,697 396,923 623 2,871 25,689 531,214

79,844 35,970 486,867 582 2,871 26,762 632,897

Efficiency ratio Cost to Income ratio Opex/ AUM Leverage (x) Leverage (x) - including off-book 25.6% 2.4% 4.3 7.6 24.9% 2.2% 4.1 7.1 23.6% 1.9% 4.7 7.2 24.2% 1.8% 4.6 6.8 24.4% 1.9% 4.7 6.6

Quarterly Financials - standalone Per share

FY11 Adj EPS () Adj Book Value () Dividend per share () Actual o/s shares - mn 50.9 211.4 6.5 226.2 FY12 53.8 260.3 6.5 226.3 FY13 58.4 310.0 7.0 226.9 FY14E 63.8 364.6 8.0 226.9 FY15E 75.3 427.2 10.0 226.9 ( m n) Total operating incom e Change (q-o-q) Adj. PAT Change (q-o-q) EPS 14.2 3,219 Q1FY13 8,025 Q2FY13 8,683 8% 3,376 5% 14.9 Q3FY13 8,959 3% 3,460 2% 15.3 Q4FY13 8,951 0% 3,552 3% 15.7 Q1FY14 9,030 1% 3,411 -4% 15.0

Source: CRISIL Research

26

Shriram Transport Finance Company Ltd

Focus Charts
Focussed on pre-owned CV financing
100% 95% 90% 85% 80% 75% 25% 24% 1% 1% 6%

AUM growth to remain strong

1% 6%

( bn)
800 700

2%

5%

6%

26.3%

30% 25.1% 25% 16.9% 20% 15% 14.5% 14.5%

24%

22%

18%

16%

15%

600

500
400 300

70%
65% 60% 55% 50% FY09 FY10 FY11 New CVs FY12 FY13 FY14E FY15E Others Pre-owned CVs Construction equipment 75% 76% 74% 74% 76% 76% 78%

10%
5% 368 421 FY12 527 FY13 604 FY14E 706 0% FY11 FY15E

200

100
-

AUM

Growth (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

NIM to moderate
9.0% 8.4% 8.5% 8.0%

Credit costs to rise owing to weak environment

3.5% 3.0% 2.5% 7.4% 7.1% 2.1% 2.8% 3.3% 86%

3.3%

86%

3.1%

100% 90%

80%
2.9% 75% 2.6% 76% 76% 76% 70% 60%

8.0%

7.7%

2.0%
1.5%

7.5%

62% 1.9% 1.6%

1.6% 1.8%

50%

1.9%

1.9%

7.0%
7.0% 1.0% 0.5% 0.0% 6.0% FY10 FY11 FY12 FY13 FY14E FY15E FY09 1.3%

40%

30%
20%

6.5%

10% 0% FY10 FY11 FY12 FY13 FY14E FY15E Gross NPA Credit costs Provision Coverage (RHS)

Source: Company, CRISIL Research

Source: Company, CRISIL Research

RoA/RoE to moderate
30.0% 25.0% 20.0% 15.0%

Performance of Shriram Transport vs CNX500

160
140

28.0%

26.6%
22.5% 19.9%

120

18.2%

18.3%

100 80 60

10.0% 5.0% 0.0% FY10 FY11 RoA FY12 FY13 FY14E RoE FY15E 3.4% 4.0% 3.7% 3.2% 2.9%

40

2.9%

20 May-13

Feb-12

Jul-12

Feb-13

Mar-12

Oct-11

Oct-12

Apr-13

Aug-13

Sep-12

Nov-11

Nov-12

Sep-13

Oct-13

Apr-12

Shriram Transport

CNX 500

-Indexed to 100 Source: Company, CRISIL Research Source: Company, CRISIL Research

Dec-13

Dec-11

Jun-12

Jun-13

Jan-13

27

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CRISIL Research Team

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