Exposure to small truck operators helped boost net interest margins

The first two months of the current fiscal have seen 6 per cent y-o-y fall in sales of medium and heavy commercial vehicles though light commercial vehicles have done well.
Thus, the volume of trucks sold in the first half of the current fiscal should be weak resulting from a spurt in capacity addition last year and also the gradual return of overloading in some parts of the country.

Besides, companies appear to be using the railways more often. Also, freight rates have either fallen or remained flat and interest rates have moved up by about 400 basis points in the last 12 months, aggravating the situation for truck operators.

Manufacturers are doing their bit to push sales by offering discounts, but judging by the numbers, operators are putting off fresh purchases. Against this backdrop, Shriram Transport Finance, which posted some strong numbers for FY07 with disbursements up 62 per cent to Rs 6,600 crore, could see its business slackening in the current year.

The financier has always enjoyed high net interest margins because it has successfully catered for small truck operators, a segment which banks and other lenders have found to be risky.

However, in Q4 FY07, disbursement of old trucks, which is the company’s core segment fell 4 per cent compared with a rise of 43 per cent for the full year. The stock has had a dream run outperforming the market in the past year.

At the current price of Rs 158, the stock trades at about two times FY08 adjusted book value and appears to be expensive given the impending slowdown in the sector.