Shriram Transport: Small is beautiful

These are not easy times for truck makers. Ashok Leyland’s volumes for July are up just 9 per cent while Eicher has actually seen a drop of about 20 per cent in sales of LCVs and about 48 per cent in heavy vehicles.

However, even in times like this when high interest rates are affecting fleet operators, the Rs 2,439 crore Shriram Transport saw a fruitful June quarter with net sales soaring 74 per cent y-o-y to Rs 821 crore. The company finances used trucks and caters to a niche segment of operators who would find it difficult to access finance from banks.

The management points out that since these operators typically use trucks that are between 5 and 12 years old, any fall in demand doesn’t really affect them. Besides, R Sridhar, managing director, observes that Shriram has increased rates only by one per cent in July after having left them untouched between April and June.

Sridhar says the increase should not hurt fleet operators. About 75 per cent of the company’s business is derived from the used trucks segment. Shriram has a 25 per cent share of the market, estimated at around Rs 60,000 crore.

The company has been able to decrease its reliance on high cost retail funds. In the June quarter, the company was able to raise more money from institutions – about 83 per cent of total borrowings against 79 per cent last year. The funds were cheaper by about 150 basis points and helped push up the firm’s margin by some 550 basis points to 78.6 per cent.

The business should grow by around 40 per cent this year to Rs 3,560 crore with net profits growing at 50 per cent to around Rs 600 crore. That should translate into an increase in the earnings per share of 45 per cent to Rs 29.

The Shriram stock has done marginally better than the market, falling 22 per cent since the start of the year as compared to a 26 per cent drop for the Sensex. At the current price of Rs 314, the stock trades at a shade under 11 times the estimated FY09 earnings and is reasonably valued.