Stock Review: Shriram Transport Finance

Shriram Transport Finance has rolled out its first auto mall in Chennai through its subsidiary Shriram Automall India. Through this initiative, the company plans to ramp up activities in trading and broking of commercial vehicles (CVs), which in turn will boost fee income. The company plans to open three more auto malls in the current financial year and another 55 or so by the end of FY13.

Analysts believe, fee income could surprise on the upside, no significant earnings accretion is expected in the medium term. According to Religare, in the long term, these steps would help in customer acquisition and improve the company's competitive positioning in the preowned CV financing space.

The new subsidiary, Shriram Automall India, will host three businesses — the auctioning of repossessed vehicles, refurbishment of preowned CVs (under the brand New Look), and electronic truck bazaars (under One Stop). The company currently auctions repossessed vehicles belonging only to Shriram Transport Finance, which repossesses around one per cent of outstanding number of CVs every year. According to analysts, the company plans to enter into tie-ups with other financiers (like HDFC Bank) and sell their vehicles as well. It is likely to charge a fixed fee (as a % of the sale price) and operate on a profit-sharing model if the auction price is higher than the base price.

The subsidiary, which will be opening auto malls, will operate on a lease model, thereby limiting capital expenditure requirements. While fee income could surprise on the upside, the earnings impact is unlikely to be significant. These steps will strengthen the company's position in the CV space. In the third quarter, the company reported 19.2 per cent increase in revenues at

`1,375.6 crore and profit after tax (PAT) was up 27.3 per cent at `301.4 crore against

`236.8 crore year-on-year. Religare expects Shriram Transport Finance to clock an earnings CAGR of 30 per cent over FY10-FY12 to 1,470 crore.

The company's ramp-up of auto malls could strengthen its presence in the commercial vehicles market