Kotak Securities Recommends Buy This Midcap NBFC Stock, Sees Robust Gains Up To 32%

Kotak Securities retains buy on Shriram Transport Finance Company Limited (STFC), a Shriram Group mid-cap diversified NBFC (having a market cap of Rs 34,383.06 crore). The brokerage suggests buy STFC stock for robust gains of up to 32% with an estimated target price of Rs 1,675 per share.

According to the brokerage, Shriram Finance will emerge as the second-largest retail-focused NBFC in India, post-merger of Shriram Transport Finance and Shriram City Union Finance. A new business structure encouraging entrepreneurship, diversified-product bouquet, coupled with a favorable business environment will support growth momentum. With limited medium-term visibility on product mix, we continue to model mid-teen RoEs.

CMP, 52-week low & high, and Returns

The Shriram Transport Finance's stock Current Market Price (CMP) is Rs 1,275.65 per share, trading 0.87% down from its previous close. Today, it opened at Rs 1,286.65 per share.
The stock in 1 month gained 5.56%, however, in 3 months, it has fallen by 2.57%. Whereas, over a year, it fell by 12.01%. In the past 3 years, it gave 16.18% positive returns. Whereas, in the past 5 years it gave 3.97% negative returns.
The stock recorded its 52 week high level at Rs 1,531.75 on 13 December 2021 and 52 week low level at Rs 1,002 on 8 March 2022, respectively.

 

A large retail-focused NBFC in below-prime segment of the market

Shriram Finance will emerge as a promising business model of scale, operating in the below prime segment of the market. While Shriram Transport Finance is currently reckoned a CV cycle play, the new model will be more diversified with likely faster growth in personal/consumption and loans to small enterprises. "We expect STFC to toggle across business segments and change its overall business composition over time, depending on new opportunities and business cycles. As such, it is challenging to forecast loan book composition and medium-term profitability matrix for the company," the brokerage has said.

FV considers merged entity and Shriram Housing; overhang of large sellers in the near term

The merger between Shriram group companies is almost complete. "Shriram City Union Finance (SCUF) has already been delisted and we expect STFC to trade as merged Shriram Finance over the next few days. Our FV of STFC (Rs1,675/share) already reflects the impact of the merger. At our RGM-based FV, we value the core business at -1.35X book and add Rs67/share (2.5X book) as value of Shriram Housing Finance," the brokerage has said.

 

Large below-prime play, undemanding valuations; BUY

Shriram's new business structure will likely encourage its business managers to focus more on regional businesses. This will augur well for personal/consumption and enterprise loans as compared to loans to pan-India CV operators. The former are anyway larger growth segments. Shriram group's long track record, unparalleled franchise in the below-prime segments and diversified and granular businesses across the country are key positives. On the other hand, effective execution in the new business structure remains the key monitorable. Strong demand and favorable lending environment provide near-term tailwinds. "Medium-term profitability is challenging to predict; based on pro forma estimates, we model mid-teen RoEs in the near term. Any synergies in the business can provide an upside over time. The company also expects rating upgrade and finer funding costs from lenders and has guided for 10% improvement in profitability over the next three years. Housing finance, though small (3.8% of consolidated loan book in 2QFY23), is a fast growth business. Coupled with undemanding valuations, we retain BUY rating on the stock," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Kotak Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.