Q1 results: Agile models support Shriram Transport, Chola Finance

Both were quick to adapt to a changing environment

Much to the surprise of investors, results posted by Shriram Transport Finance Corporation and Cholamandalam Investment and Finance Company (Chola Finance) exceeded expectations. 

Both managed reasonable profit growth in the June quarter (Q1) and kept a neat check on costs. Loan growth held up reasonably well, too. Shriram Transport grew its loan book by 4 per cent year-on-year (YoY) in Q1, though overall disbursement fell 8 per cent. Growth was faster for Chola Finance, which saw loans swell 23 per cent YoY in Q1.

Even if the growth rates significantly trail the past trends, what has helped the two financiers is that they were quick to adapt to the changing environment. For instance, Shriram Transport has increased its focus on used vehicle credit, which formed about 83 per cent of its loan book in the June quarter. 

While loans to used vehicles carry lower value against loans to new vehicles in a market where demand for used vehicles is marginally better, the company’s ability to switch focus has helped mitigate the slowdown in the commercial vehicles (CV) space. 

The firm also increased its preference towards funding light CVs, demand of which is better compared to other segments.  Increasing focus on working capital loans such as funding for replacement of tyres, insurance premium, fuel costs — which would enable the fleet operator for seamless functioning of business — has helped Shriram Transport, though they make up only a small proportion of its loan book, says the management. 

Analysts at Edelweiss say Shriram Transport’s niche positioning and sustained investment in building franchise should lead to a relatively better H2FY20.

Chola Finance, whose loan book is smaller than Shriram Transport’s and traditionally caters to heavy CVs and cars, altered its focus, which helped its loan disbursements grow 22 per cent YoY in the quarter. 

This is the highest growth posted by an NBFC so far. Increasing loan exposure to light CVs, two-wheelers, and used CVs has helped Chola Finance in Q1. This strategy has also led to market share gains in segments in which it wasn’t very dominant earlier. 

The problem for both CV lenders is that of cost of funds. At about 9.0-9.5 per cent, analysts say costs have almost petered out and therefore net interest margin (NIM) should stabilise at 6.5 per cent for Chola Finance and 7.5 per cent for Shriram Transport.

Consequently, Rajiv Mehta of YES Securities says that the two stocks are attractive at current levels — Shriram Transport for trading at 1.2 times its FY21 book value, and Chola Finance for its ability to ride out a tough pace.