Bumpy road to profitability seen for Shriram Transport amid merger plans

Trucking finance firm's merger plans stoke fears of truck financing dilution

Shriram Transport Finance Company (STFC) — a truck and commercial vehicle financier — has been one of the biggest losers among the BSE 200 stocks in recent weeks. The company’s stock price is down nearly 16 per cent in the last one month, against 0.5 per cent rise on the benchmark BSE Sensex during the period. The stock closed on Monday at Rs 1,217.6 apiece, down 27 per cent from its 52-week high share price of Rs 1,664 made on November 8.

Analysts attribute this to investors’ concerns about the company’s merger with group firms Shriram City Union Finance (SCUF) and Shriram Capital.

“Investors are not too happy with the promoter’s plan to consolidate the group’s entire lending business under STFC. The fear is that it will dilute STFC’s focus on truck financing that it dominates, leading to loss of market share,” says Chokkalingam G, founder and managing director (MD), Equinomics Research & Advisory.

Analysts see very little synergy or overlap between STFC’s core business, where the company deals with truck owners and transporters, and SCUF, whose clientele largely include the salaried and the self-employed in urban areas.

“The danger is that the merger might create a bloated organisation with completely two different lines of business with little gains from the merger,” says Dhananjay Sinha, MD and chief strategist, JM Institutional Equities. 

There is also a worry that the merger will result in a rise in STFC exposure to riskier assets.

“The management’s plans for higher growth by the combined entity could heighten STFC’s risk appetite and raise asset-quality risks. Each business targets different market niches with differentiated lending products, which require tailored underwriting skills,” write analysts at Fitch Ratings in their commentary on the planned merger.

Fitch Ratings says the STFC’s used commercial vehicle underwriting requires vehicle-valuation expertise and a feel for freight-market dynamics, whereas SCUF’s varied products — small business, two-wheeler, rural housing, and gold loans — need separate risk assessments.

Analysts also expect STFC to face headwinds from a rise in interest rate.

“In the last few quarters, STFC had access to low-cost funding from a special Reserve Bank of India (RBI) window for non-banking financial companies. This has now ended and the company will have to hit the bond market to raise funds, leading to a rise in its cost of funds. This will squeeze margins, leading to lower profitability,” adds Sinha.

There is also a concern about growth and rise in bad loans once the RBI normalises its monetary policy.

“The bump-up in truck freight rate and the demand for new and old trucks seems to be waning. This could slow the loan growth trajectory for the company,” says Chokkalingam.

The company’s gross interest income was up just 8.1 per cent year-on-year (YoY) in the September quarter (second quarter, or Q2) of 2021-22 (FY22) — a sharp deceleration from 12.3 per cent growth in the first quarter of FY22. The company managed to report a respectable 12.7 per cent YoY growth in net profit in Q2FY22, largely due to decline in its cost of funds and lower provisioning for bad loans.

Analysts see these tailwinds to reverse, given the recent rise in bond yields and a potential rise in bad loans in the forthcoming quarters.

Non-banking lenders like STFC also face greater competition from commercial banks, which have turned their attention to the retail segment since there is little demand for fresh loans from the corporate sector.