SHRIRAM TRANSPORT FINANCE

Citigroup initiates coverage of Shriram Transport with a `Buy' rating and a target of Rs 615, implying 23% upside. Shriram is India's largest organised pre-owned commercial vehicle (CV) financier with:

 

1) strong loan growth (24% pa in FY09-12E),

2) a robust return profile (24-28% RoE),

3) a biz model that is unique and has scale, and

4) cyclical upside from an improving CV cycle.

 

Although the stock has been a major outperformer, Citigroup believes there is more upside ahead. The following factors differentiate Shriram:

 

a) Regulatory arbitrage - preferred access to funding, demand for its loans (priority sector);

b) Low-cost distribution network and operations; and

c) Operating and regulatory flexibility.

 

Few regulatory barriers to entry exist, but scale, asset quality management, asset concentration and widening of asset mix/distribution channels will likely keep it as a one-of-a-kind lender in India. Shriram has been a low-beta stock, but it has a) asset/growth concentration, b) asset-side-only value (no retail liability franchise), c) wholesale funding (rate/liquidity sensitive) - a current risk. Citigroup believes the business itself, and asset and funding expansion and returns will remain strong and more predictable.