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Thursday, September 10, 2009

Shriram Transport Finance Company Ltd:Can it be bought at present levels.

Scripsccan:Shriram Transport Finance Company Ltd

Story:SHRIRAM Transport Finance (STF) is the only player in the organised sector, which caters to finance-related requirements of small truck operators (less than two to three trucks). It is among the largest non-banking finance companies (NBFCs) in the country, and has overtaken its peers during the current slowdown.The company has carved a niche for itself by financing second-hand commercial vehicles (CV) over the past three decades. Often, this market is considered risky by banks because borrowers, who are predominantly from the lower socio-economic group, cannot provide documentary evidence. STF has built relationships with small truck operators over relatively long time periods and this helps it get a better understanding of its borrowers.The company''s experience in its target market acts as an entry barrier to any new player, be it a bank or an NBFC. Moreover, its business is relatively insulated from the ups and downs of the commercial vehicle industry, because the sales of trucks and other CVs speed up in the first phase of an economic boom.The company plans to reach an asset under management of Rs 30,000 crore by the end of current fiscal, translating it into a growth of 29% over the previous year. India''s economy is expected to grow by 5-5.5% at an average annual rate in the next decade. This requires huge capacity additions in all kinds of infrastructure including CVs. At the same time, there are legislative pressures on banning trucks beyond 15 years. This will lead to a replacement boom, helping the company grow its loan book for both new and old CVs. It appears that STF is a long-term growth story.The stock trades at a price to earning (P/E) multiple of 10 times its forward earnings. The company has a consistent record as its net profit has grown at a compounded annual growth rate of 63% in the past three financial years. Given its strong footing in the second hand CV space and cheaper valuations, investors can include the stock in their portfolio with a horizon of two years.

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