Stock Review: SREI Infrastructure Finance

Investors with a high-risk appetite and long-term perspective can consider SREI Infrastructure Finance

KOLKATA-BASED SREI Infrastructure Finance is one of the leading non-banking finance companies in India. The company has over 8,000 crore in assets under management with over 15,000 clients. SREI was the first Indian infrastructure financing institution to get listed on the London Stock Exchange in 2005. Many international institutions such as International Finance Corporation are among the stakeholders in the company.

BUSINESS: The company operates mainly into infrastructure equipment finance, project finance, advisory and insurance broking. SREI has a pan-India presence with a network of 86 offices. It is also expanding overseas and has three offices in Russia.The company is a market leader in construction equipment financing with a 30% market share. It has recently tied up with Aayan Capital of Saudi Arabia for providing technical advisory services by setting up an equipment leasing company in Saudi Arabia.

FINANCIALS: On a consolidated basis, the company has almost tripled its disbursements in the past four quarters on an annual basis. Sectors such as energy and roads have contributed to such high growth. This has also doubled the net interest income — the difference between interest earned and interest expenses, of the company.

    As the effect of low base recedes, such high growth in disbursements might be difficult to attain. However, the management hopes that buoyancy in project and equipment financing would grow its advances by around 50% by the end of FY11. During the September 2010 quarter, the company reported 210 basis points jump in its net interest margin — the interest spread between borrowing and lending. This was mainly because favourable foreign currency movement reduced the interest costs of the company's overseas borrowings.

    Such performance might be difficult in future. Bank funds form 39% of the company's liabilities. With the RBI raising banks' borrowing rates, most banks have already increased their lending rates. This would increase the borrowing costs of the company. The margins, therefore, will reduce in the coming quarter.

    This effect is likely to be short-term in nature. The average maturity of the company's assets is half a year lower than the average maturity of its liabilities. Thus, its assets are re-priced faster than its liabilities. Moreover, all its assets and liabilities are of floating nature. This means that any raise or cut in the company's borrowing
rates can be passed on to its customers. The company's asset quality has deteriorated marginally in the past two quarters as the company reported higher bad loans compared with the year ago. Net non-performing assets formed 0.4% of net advances up by about 6 basis points. Given that most non-banking finance companies struggle to keep bad loans under 1%, the company's asset quality is one of the best in its industry.

VALUATION: At 1.4 times its book value, the company's stock is one of the cheapest in the infrastructure finance sector. Its peers such as IDFC and IFCI are trading at around 1.9 times its book value. However, the stock has a high correlation with the broad market. It's beta stands at 1.3, which means the stock price would change at a faster rate than the change in the benchmark stock index such as the Sensex. As such, investors with a high-risk appetite and long-term perspective can consider this stock.