Shriram Transport Finance — Annual Letter Analysis

When STFC had released their annual results and the Q4 numbers, I had written the following post after looking at the provisions for the Shriram Equipment Finance division. Now, their annual report was released and as with most longs I have, I did read through the report over the weekend.

In 2015 compared to 2014, NIM on AUM remained very strong at 6.61% versus 6.68% prior year. Despite the additional INR 325 crores of provisions in 2015 in the Shriram’s equipment subsidiary, and the total provisions increasing by 28% to 1,612 crores from 1,213 Crores in 2014, the company reported net profits north of INR 1,000 crores.  On the balance sheet, there is still INR ~1,800 Crores already provisioned waiting for assets to go bad and paid out.

Interesting was how little the subject of write off in the equipment business got a mention in the main annual report of STFC.

The total AUM is up to 62K Crores from 52K Crores.  Diluted EPS is down to INR 45 from 59 in 2014. The company earned 1,022 Crores in 2015 compared to 1,357 in 2014. Rest of the things were boilerplate with the expected recovery in the economy and the commercial vehicle market expected to drive higher earnings but it does look like the long term story does look intact.

The one thing that caught my eye was note 22 in the annual report.


For the company to start losing money or book value to start going backwards close to 2,600 crores or close 4.5% of its book must go bad at the same time every year. Even after that, the company has sufficient reserves and a high CAR to take pain for a while before it would start bleeding bad. Assuming that the company has taken the bloodbath in the equipment finance arm, one can expect to see some improvement in the consolidated EPS but looks like recovery in the economy might be a while away and the company might continue to struggle on the NPA’s on the main transport finance business.

As we have iterated in the past, a good economic moat surrounds the business, with a management that is conservative and has demonstrated integrity in the past, though in a cyclical business. The long term story does seem to remain intact.

Disclosure: Long STFC


Shriram Transport Finance and Leverage

Shriram Transport Finance reported abysmal numbers in Q4 2015 with EPS down 74% compared to same quarter last year largely driven by the write off it had to take in one of its subsidiaries, Shriram Equipment Finance. Shriram Equipment Finance, established in 2009, lends to the construction industry for  machinery equipments like cranes, forklifts, loaders etc. required to do the construction work. Over the years, the company had been reporting steady profits, book value growth and asset quality. Backed by the conservativeness of the accounting the management had followed in the past, the management pedigree and the high CAR ratios, there was little reason to worry before this quarter.

Then WHAM!!!

Shriram Equipment

The company provisioned around INR 2300 Million up above 900% from last quarter. It basically provisioned  95% of all the net worth that it had garnered still its establishment in 2009. With this provisioning, the coverage ratio is still at 60%. While the company is hopeful that the construction business will pick up and they will recover the debts, it also means some more pain might be in order if the construction activity does not pick up.

This is a good lesson on how leverage can affect the results drastically both ways. While we have always emphasized that the finance business is only as good as the conservativeness of accounting and the pedigree of the management, it is an eye-opener on how quickly the game can change in the face of a bad quarter. While it is tough to absolve the management on why they did not see it coming, investors can breathe a little easy as Shriram Equipment Finance makes up a small portion of the total Shriram Transport Finance group. However, given the leverage, it managed to write off three quarters of the profit of the parent company. It is a hard reminder on how easy it is to lull oneself into believing that good returns are in order in the lending business.

Disclosure: Long Shriram Transport Finance