Attractive yield on offer!

Thirty-two year-old company focusing on a growing business is bringing out an issue of redeemable NCDs. The company’s financial performance has been robust, the issue is fully secured and the yield on offer is attractive. However, economic conditions and riising interest rates could impair asset quality.

OFFER AT A GLANCE
Name	Shriram Transport Finance Company Ltd
Issue	Public issue of NCDs aggregating to Rs.500 cr with an option to retain oversubscription upto Rs.500 cr
Offer Amount	Rs. 1,000 cr (including retention of oversubscription)
Face value of NCDs	Rs. 1,000
Issue Price	Rs.1,000
Minimum Application	Rs.10,000 (10 NCDs)
Interest Payment	Annual
Coupon Rate	Please see options below
Offer Opens	27-Jun-11
Offer Closes	9-Jul-11
Rating	AA/Stable (CRISIL), CARE AA+ (CARE)
Listing on	NSE
Lead Managers	JM Financial, ICICI Securities
Co-lead Managers	RR Investors Capital, Karvy Investors Services
Registrars	Integrated Enterprises

 

OPTIONS AVAILABLE
Description	Option I	Option II
Coupon Rate for QIB/Cos/Trusts/Partnership Firms	11.10% p.a	11.00% p.a
Coupon Rate for reserved individual portion	11.60 % p.a	11.35% p.a
Coupon Rate for unreserved individual portion	11.35% p.a	11.10% p.a
Put and Call option	End of 48 months	Nil
Redemption at the end of	60 Months*	36 Months
Basis of Allotment: 40% for reserved individual portion; 40% for unreserved individual portion; 10% for QIB and 10% Non-institutional portion

*subject to the exercise of put and/or call option

 

Issue Objective 

The company is making the current issue of redeemable non-convertible debentures to finance its lending activities and investments, repay existing loans and meet the needs of business operations including working capital requirements.

 

Business

Incorporated in 1979, Shriram Transport Finance Company Ltd (STFC) is reportedly the largest Indian asset financing NBFC. The company is registered as a deposit-taking NBFC with the RBI which enables the company to accept deposits from the public. At last count, the company has a network of branches in India numbering 488 and employs 16,919 personnel to man them.

The company finances new as well as pre-owned commercial vehicles though the pre-owned segment is its forte. Over the years, the company has emerged as a niche player in the commercial vehicle financing segment.

Recently, the company has forayed into the business of providing stock yard services, refurbishing pre-owned commercial vehicles and construction equipment and providing a trading platform for the auctioning and sale of such pre-owned commercial vehicles and construction equipment, showrooms for refurbished pre-owned commercial vehicles through its wholly owned subsidiary Shriram Automall India Ltd.

The business of providing equipment finance in connection with both new and pre-owned construction and other equipment is dispensed through STFC’s another wholly owned subsidiary, Shriram Equipment Finance Ltd.

The Reserve Bank of India currently requires scheduled commercial banks to maintain an aggregate of 40% (32% in the case of foreign banks) of their advances to the priority sector of the economy, which, inter alia, consists of advances to Small Road Transport Operators (SRTOs). Advances to SRTOs constitute the bulk of STFC’s loan portfolio. As commercial banks find it difficult to organically construct a portfolio of such priority sector advances, they find it easier to buy such loans from players such as STFC.

Such securitized loans form a significant chunk of STFC’s asset portfolio. While the upside is that STFC makes a neat spread from offloading such assets in favour of commercial banks, the sale is usually `with recourse’ to STFC, meaning that in the event of credit delinquency, STFC would be called upon to make good the loss.

 

Financial performance

STFC’s top line grew from Rs.1,403 cr in fiscal 2007 to Rs.5,230 cr in fiscal 2011 thereby recording a robust CAGR of 39%. During the same period, the company’s profit before tax grew at a faster clip – CAGR 59% – from Rs.289 cr to Rs,1,849 cr.

The loan assets, net of securitized assets offloaded in favour of institutions, grew from Rs.8,416 cr in fiscal 2007 to Rs.19,866 cr in fiscal 2011. This growth was funded by a near-matching growth in borrowed funds from Rs.8,695 cr to Rs.19,881 cr  in the most recent fiscal. During this period, the company has been able to contain its gross and net non-performing assets at acceptable levels. At the end of March 2011, STFC’s gross and net NPAs were 2.66% and 0.38% respectively. 

Thanks to its robust financial performance, the company’s net worth has moved up over four-fold from Rs.1,086 cr in fiscal 2007 to Rs.4,867 cr in fiscal 2011. The company’s earnings per share and book value at the end of fiscal 2011 stood at Rs.53.8 and Rs.225 respectively.

 

Prospects 

Over the last 7 years, between fiscal 2005 and fiscal 2011, domestic commercial vehicle sales has consistently logged positive growth except in fiscal 2009 when it contracted by 21.7%. During this period, the number of commercial vehicles sold has moved up from 3,18,430 in fiscal 2005 to 6,76,408 in fiscal 2011, clocking a CAGR of 13.4%.

While the trend is largely expected to continue, recent increase in interest rates could moderate growth and act as a short term dampener.

As for STFC, the immediate concern would be to ensure that in an environment of stagnation or marginal growth, non-performing assets do not spin out of control.

 

Positives

• STFC’s capital adequacy ratio (CAR) stands at a comfortable 24.85% at the end of fiscal 2011, well above the RBI mandated 12%. Of this, the Tier-I CAR alone stood at 16.65%.
• Inability of commercial banks to originate priority sector loans to SRTO segment could continue to provide opportunity for growth to STFC
• Strong net worth of Rs.4,867 cr could cushion any near-term impact of asset quality
• Return on net worth has been consistently impressive, with the latest one being 25.27% in fiscal 2011.
• Secured Loans amount to about 75% of outstanding obligations. Hence, subscribers of the proposed issued stand on a better wicket as compared to those investing in unsecured or subordinated debt

 

Concerns

• Rising or volatile interest rate scenario could impair the quality of loans of the company which in turn could affect the company’s Rating and thus its ability to raise fresh funds
• The company is mainly a single-industry player. Any prospects affecting the fortunes of the commercial vehicle industry could have consequential impact on the company
• A large part of the company’s collections are in cash, which enhances the risk of possible mishandling
• Currently the company’s employees are not organized into a union. Should they decide to form a union in future, the company could face HR issues and consequent impact on its operations
• Given the large volume of securitized assets sold by STFC, any recourse made by the purchasers of STFC’s securitized portfolio would have a sharp impact on STFC
• In the event of RBI altering the definition of priority sector advances to the detriment of STFC, the company’s business model could be impacted.
• Though the company is seeking to provide asset cover of 100% on the proposed NCDs, quality of such asset cover and their future valuation could possibly jeopardize the interest of investors

 

Conclusion

The yield on offer is in tune with the present high interest rate scenario prevalent now.

There is apparently a strong demand for Option-I of the offer from PFs and Mutual Funds. However, the issue has a liberal reservation of 40% each for retail and HNI investors. Hence, retail investors would do well to apply for Option-I as the coupon rate is higher for this category.

Another important aspect to remember is that the issue is on a `first-come-first-served’ basis. Therefore, if the issue is oversubscribed on the first day, later applicants would not be able to secure an allotment.