MOSL: SHRIRAM TRANSPORT FINANCE (Buy)-Riding the CV wave; Best-in-class RoE; 30%+ PAT CAGR

Shriram Transport Finance: Riding the CV wave; Best-in-class RoE; 30%+ PAT CAGR

(SHTF IN, Mkt Cap USD5.4b, CMP INR1562, TP INR1925, 23% Upside, Buy)

• We met the management of Shriram Transport Finance (SHTF) and returned with renewed optimism on its business prospects.
• Over the past few years, while CV volumes have been stagnant, there has been a marked shift in mix towards higher-tonnage vehicles. In addition, price hikes in the past two years have been healthy (18-20% on new vehicles). While the addressable market size for SHTF in terms of volumes will remain largely stable, we believe better pricing and mix will drive disbursement and AUM growth.
• AUM is likely to grow 18-19% in FY18 as compared to the management’s earlier guidance of 15% growth. We keep our FY18 AUM growth estimate of 18% unchanged, but modestly increase FY18-20E AUM CAGR to 17%.
• The management believes that used CV pricing will at least remain firm (or might even improve) over the next 3-4 years as a result of pricing increases in new CVs stemming from BS4, and subsequently, BS6 implementation. This is unlike the past few years, when used CV prices were under pressure. This will help SHTF in two ways: (a) AUM growth will remain steady, and (b) ultimate losses from sale of repossessed vehicles will be lower than before.