Shriram Transport Finance Subsidiaries witness sharp increase in NPA

Shriram Transport Finance Subsidiaries witness sharp increase in NPA Shriram Transport Finance s (STFC) standalone performance was broadly in-line with our expectation but grossly disappointed on asset quality front in its equipment finance subsidiary. GNPA ratio of Shriram Equipment Finance increased to 15.7% in 4QFY15 v/s 2.9% in 3QFY15 as the company classified Rs4bn of equipment loans to NPA during the quarter. As a result, Shriram Equipment Finance declared a loss of Rs2bn in FY15 v/s profit of Rs868mn in FY14. Consequently, net worth of the company got wiped off and parent infused additional Rs1bn as equity in the equipment finance subsidiary. Further, management has indicated that another Rs4bn of loan in equipment finance subsidiary is 150 day overdue and may be declared NPA in coming quarters. Management has also indicated that recovering these loans are bit tough due to specialized usage of these equipments. Although, contribution of equipment finance subsidiary in the group s overall AUM is ~5%, but it will remain a drag on the stock performance in the coming few quarters. Hence, we downgrade the stock to HOLD. Standalone performance remained healthy Standalone performance of the Shriram Transport Finance was broadly in line with our expectation as PAT increased 7.4% yoy and 1.4% qoq on account of sturdy progress in NII and lower operating expenditure. NII witnessed strong growth (+48.8% yoy; +3.2% qoq) led by healthy growth in AUM and control over slippages. Asset quality in standalone business was arrested as management continued to focus on improving collections. Pickup in core business segment The company witnessed healthy growth in disbursement led by improvement in used CV demand during the quarter. AUM for pre-owned segment increased to Rs537bn, a growth of 15.4% yoy and 4.1% qoq. However, AUM growth in new CV segment remained muted (-25.1% yoy; -2.2% qoq) due to higher repayment. Share of pre-owned vehicle in overall AUM increased to 92% from 88% in Mar 14 and 91.5% in Dec 14. Pickup in the CV demand and improving macroeconomic scenario provide ample room for recovery in growth trajectory. Management has guided a 12-15% growth in loan book in FY16E. Margins improved sequentially Moderation in incremental cost of fund aided STFC to improve standalone margin by 21bps yoy and 3bps qoq to 6.7%. Control over fresh slippages also helped to lower interest reversals further supporting margins during the quarter. This along with healthy growth in AUM helped the company to post strong NII. Going forward, we believe margins to improve further led by drop in corporate bond yield, likely downward revision of base rate by banks and higher upgrades & recovery from NPA. Bank loan contributes 67% of the total borrowing and ~50% of these loans are linked to base rate. Outlook and Valuation Despite the gradual improvement in the core business, we expect Shriram Transport Finance to underperform the broader market due to dismal performance of its equipment finance subsidiary. Although, contribution of Shriram Equipment Finance Ltd in overall AUM was mere 5% but the poor asset quality would remain a big drag on the overall performance. Hence, we downgrade the stock to HOLD with a revised Target Price of Rs1,016. HOLD CMP*(Rs) 970 Target Price (Rs) 1,016 Upside/ (Downside) (%) 5 Bloomberg Ticker SHTF:IN Market Cap. (Rs bn) 220 Free Float (%) 75 Shares O/S (mn) 226.9 Shareholding Pattern (%) Dec 14 Mar 15 Promoter 26.1 26.1 FII 48.1 51.2 DII 7.3 4.2 Others 18.6 18.6 (Rs mn) FY15 FY16E FY17E NII 33,750 45,274 55,935 Other Inc. 7,379 7,438 7,672 PPP 31,054 42,676 51,916 Net Profit 12,378 16,238 20,065 EPS (Rs) 54.6 71.6 88.4 ABV (Rs) 400.4 477.4 564.4 FY15 FY16E FY17E P/ABV (x) 2.4 2.0 1.7 P/E (x) 17.8 13.6 11.0 GNPA (%) 4.9 4.0 3.5 NNPA (%) 1.8 1.5 1.3 Avg. ROA (%) 2.3 2.6 2.8 Avg. ROE (%) 14.1 16.2 17.0 1 Year Relative Price Performance 180 160 140 120 100 80 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 NIFTY CNX Bank Shriram Transport Finance Note: * CMP as on April 30, 2015 Research Analyst: Asutosh Kumar Mishra Contact: (022) 33201323 Email: asutosh.mishra@relianceada.com P a g e 1

Exhibit 1: Income Statement Analysis (Rs mn) 4QFY15 4QFY14 % yoy 3QFY15 % qoq FY15 FY14 % yoy Interest Income 21,364 16,379 30.4 20,534 4.0 77,779 62,664 24.1 Interest expended 11,886 10,011 18.7 11,351 4.7 44,029 38,982 12.9 Net Interest Income 9,478 6,368 48.8 9,183 3.2 33,750 23,683 42.5 Net Income from Securitisation 1,376 2,756 (50.1) 1,341 2.6 7,379 12,796 (42.3) NII including Securitisation Income 10,854 9,124 19.0 10,524 3.1 41,129 36,479 12.7 Other fee based income 3 4 (26.8) 3 (9.1) 12 22 (45.7) Operating Income 10,857 9,128 18.9 10,527 3.1 41,141 36,501 12.7 Operating expenditure 2,991 2,467 21.3 2,702 10.7 10,783 9,561 12.8 PPP 7,866 6,662 18.1 7,826 0.5 30,359 26,940 12.7 Other Income 157 238 (34.1) 147 6.7 695 1,634 (57.5) Operating Profit 8,023 6,900 16.3 7,973 0.6 31,054 28,573 8.7 Provisions for Bad Debts 3,234 2,493 29.7 3,153 2.6 12,331 10,167 21.3 Provisions against Standard Assets 6.9 (35.4) (119) 115.5 (94) 298.2 126.1 136 PBT 4,782 4,442 7.6 4,704 1.7 18,424 18,280 0.8 Tax 1,615 1,493 8.2 1,580 2.2 6,046 5,638 7.2 PAT 3,167 2,950 7.4 3,125 1.4 12,378 12,642 (2.1) EPS (Rs) 14.0 13.0 7.4 13.8 1.4 54.6 55.7 (2.1) Source: Company, RSec Research Exhibit 2: Balance Sheet Analysis (Rs mn) 4QFY15 4QFY14 % yoy (bps) 3QFY15 % qoq (bps) AUM Analysis On Books (mn) 492,271 364,737 35.0 489,942 0.5 Off Books (mn) 98,811 166,284 (40.6) 80,771 22.3 Total AUM (mn) 591,083 531,021 11.3 570,713 3.6 New CVs 46,802 62,499 (25.1) 47,845 (2.2) Pre-Owned CVs 537,421 465,540 15.4 516,148 4.1 AUM 584,223 528,039 10.6 563,993 3.6 Gross NPA (mn) 18,941 14,505 30.6 17,797 6.4 Gross NPA (%) 3.8 3.9 (7) 3.6 20 Net NPA (mn) 3,791 3,029 25.2 3,561 6.5 Net NPA (%) 0.8 0.8 (5) 0.7 4 NIM (%) 6.7 6.5 21 6.6 3 C/I Ratio (%) 25.0 24.9 14 23.4 159 Interest Covr. Ratio (%) 1.9 2.0 (2) 2.0 (2) Tier I Ratio (%) 16.4 17.7 (126) 16.5 (6) Total CAR Ratio (%) 16.4 23.4 (696) 21.1 (464) Source: Company, RSec Research P a g e 2

Profit and Loss Statement Y/E March (Rs mn) Interest Earned 44,971 62,664 77,779 93,679 104,222 Interest Expenditure 28,492 38,982 44,029 48,404 48,287 Net Interest Income 16,479 23,683 33,750 45,274 55,935 Net Income from Securitization 18,057 12,796 7,379 7,438 7,672 Other Income 1,885 1,655 707 746 787 Net Operating Income 36,421 38,134 41,836 53,458 64,393 Core Operating Income 34,536 36,479 41,129 52,713 63,607 Employee Expenses 3,898 4,089 4,296 4,661 5,244 Other Expenses 3,910 5,472 6,487 7,816 9,458 Operating Expenses 7,808 9,561 10,783 10,783 12,478 Operating Profit 28,613 28,573 31,054 42,676 51,916 Provisions and Contingencies 8,451 10,293 12,630 18,619 22,189 Profit Before Tax 20,162 18,280 18,424 24,056 29,727 Taxes 6,556 5,638 6,046 7,818 9,661 Profit After Tax 13,606 12,642 12,378 16,238 20,065 Balance Sheet Y/E March (Rs mn) Equity & Liabilities Capital 2,269 2,269 2,269 2,269 2,269 Reserves Total 69,675 80,463 90,111 106,056 125,800 Net Worth 71,944 82,732 92,380 108,325 128,069 Long term borrowings 190,530 227,121 315,708 320,488 368,153 Other Long term Liabilities 12,976 9,870 9,713 10,345 11,431 Long Term provisions 11,347 12,717 15,865 17,531 18,144 Current Liabilities 157,777 159,817 159,606 220,005 252,065 Total Liabilities 444,575 492,257 593,272 676,694 777,862 Assets Fixed Assets 601 1,007 1,007 1,088 1,148 Non-current investments 5,923 6,878 11,143 13,371 15,845 Deferred tax assets 2,838 2,512 2,565 2,590 2,616 Long term loans and advances 194,835 220,991 308,229 334,567 389,994 Other Non Current Assets 1,702 944 931 1,006 1,111 Non-current assets 205,899 232,331 323,875 352,622 410,714 Current Investments 29,766 20,375 22,129 23,900 26,289 Cash and cash equivalents 63,193 70,860 47,234 52,194 57,674 Short term loans and advances 144,948 167,891 199,409 247,289 282,409 Other current assets 772 800 624 690 776 Current assets 238,679 259,926 269,397 324,072 367,149 Total Assets 444,578 492,257 593,272 676,694 777,862 P a g e 3

Per Share Data and Valuation No. of Shares 226.9 226.9 226.9 226.9 226.9 Earnings Per Share (Rs) 60.0 55.7 54.6 71.6 88.4 Book Value / Share (Rs) 317.1 364.6 407.1 477.4 564.4 ABV/Share (Rs) 317.1 358.0 400.4 477.4 564.4 Dividend Per Share (Rs) 0.7 0.7 1.0 1.1 1.2 Price/ Earnings (x) 16.2 17.4 17.8 13.6 11.0 Price/ ABV (x) 3.1 2.7 2.4 2.0 1.7 RoA Tree Analysis Interest Income / Avg Assets 11.2 13.4 14.3 14.8 14.3 Interest Expenses / Avg Assets 7.1 8.3 8.1 7.6 6.6 NII / Avg Assets 4.1 5.1 6.2 7.1 7.7 Other Income / Avg Assets 0.5 0.4 0.1 0.1 0.1 Operating Income / Avg Assets 4.6 5.4 6.4 7.3 7.8 Employee Exp as % Net Operating Income 21.2 16.1 12.5 10.1 9.2 Employee Exp. / Avg Assets 1.0 0.9 0.8 0.7 0.7 Office & Admin as % Net Operating Income 21.3 21.6 18.8 17.0 16.7 Office & Admin / Avg Assets 1.0 1.2 1.2 1.2 1.3 Cost to Income Ratio 42.5 37.7 31.3 27.1 25.9 Opex / Avg. Assets 2.0 2.0 2.0 2.0 2.0 Depreciation / Avg. Assets - - - - - Credit Cost 2.5 2.7 2.5 3.2 3.3 NPA Provisions as % NOI 46.0 40.6 36.7 40.5 39.1 NPA Prov. / Avg. Assets 2.1 2.2 2.3 2.9 3.1 PBT / Avg. Assets 5.0 3.9 3.4 3.8 4.1 Effective Tax Rate 32.5 30.8 32.8 32.5 32.5 Tax / Avg. Assets 1.6 1.2 1.1 1.2 1.3 RoA 3.4 2.7 2.3 2.6 2.8 Leverage Ratio 16.2 16.8 15.6 16.0 16.5 RoE 20.6 16.4 14.1 16.2 17.0 P a g e 4

Growth Ratio yoy (%) Net Worth 20.1 15.0 11.7 17.3 18.2 Loan Book 30.3 14.4 30.5 14.6 15.6 Borrowings 35.9 13.3 23.7 14.5 14.9 Total Assets / Liability 24.3 10.7 20.5 14.1 15.0 Total Working Assets 28.0 14.1 21.3 14.4 15.2 Total Working Fund (WF) 32.6 13.7 20.5 15.9 15.5 Net Interest Income 35.2 43.7 42.5 34.1 23.5 Other Income 46.8 (12.2) (57.3) 5.5 5.5 Employee expenses 5.5 4.9 5.1 8.5 12.5 Operating Expenses 9.8 22.5 12.8 15.7 17.8 Loan losses and Provisions 10.9 21.8 22.7 47.4 19.2 Profit Before Tax 7.2 (9.3) 0.8 30.6 23.6 Taxes 5.2 (14.0) 7.2 29.3 23.6 Net Profit 8.2 (7.1) (2.1) 31.2 23.6 Yields / Margins (%) Cost of Fund - CoF 8.98 10.84 9.90 9.50 8.25 Yield On Fund - YoF 13.24 16.11 15.32 16.10 15.50 Net Interest Margin 4.53 5.41 6.54 7.46 8.03 Spread 4.25 5.27 5.43 6.60 7.25 Asset Quality (%) Gross NPA Ratio 3.20 3.86 4.86 4.00 3.50 Net NPA Ratio 0.77 0.83 1.83 1.50 1.25 PCR 100.0 79.1 79.1 62.5 64.3 Credit Cost 2.49 2.65 2.49 3.20 3.30 P a g e 5

General Disclaimers: This Research Report (hereinafter called 'Report') is prepared and distributed by Reliance Securities Limited (RSL) for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purposes of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or offering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, affiliates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. Risks: Trading and investment in securities are subject market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value securities referred to herein may be adversely affected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces affecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be affected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may affect the pricing of derivatives. Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India. Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/opinions in respect of the securities and their respective issuers. Neither RSL nor the research analysts had any known direct /indirect conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made, during the preparation of this Report. Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL. Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of. ISO 9001:2008: Reliance Securities Limited holds a certificate issued by BSI Management System India Pvt. Ltd to the effect that it operates a Quality Management System that complies with the requirements of ISO 9001:2008 for providing equity & equity derivative trading services through online trading system. Investment in securities market is subject to market risk. Please read the risk disclosure document before investing. Reliance Securities is a distributor for MF, IPO, Bonds, NCDs and Corporate FDs Registered Office: Reliance Securities Limited, 11th Floor, R-Tech IT Park, Western Express Highway, Goregaon (East), Mumbai - 400063. Tel: +91 22 3320 1212, CIN: U65990MH2005PLC154052. (NSE - INB / INF / INE 231234833; BSE - INB / INF / INE 011234839; AMFI ARN No.29889).Reliance Securities Limited is a Stock Broker with BSE Limited (SEBI Registration Nos. INB011234839, INF011234839 and INE011234839); with National Stock Exchange of India Limited (SEBI Registration Nos. INB231234833, INF231234833, and INF231234833). P a g e 6