Shriram Transport NCD or FD or Shares ???

Last night I was going through an advertisement for Shriram Transport (STFC)  Fixed Deposit with 10.75% interest rate (+0.25% for senior). I started wondering if its worth putting money at 10.75%. I pulled up the Excel and put all the numbers. But then I thought for a while and compared it with Shriram Transport’s share performance and I put everything in a table for simple comparison and here it is.

   

For example if you had invested One lac Rupees in FD at 10.75% and with 20% tax bracket for an average person, you would have earned 2,25,942 after tax in 10 years. But if you had invested same in its stock in 2004, you would have made just shy 45 Lacs. What a difference !!!  Compare 2.25 Lacs with 45 Lacs.

So why would you invest in STFC’s FD if you get so much of return in stocks? If you had invested for any other time period (refer: the Table) you still would have made same or more compared to FD. Is it worth investing in STFC’s stock ?

So what does STFC do for living? They are a non banking financial company - a specialty financing in trucks and commercial vehicles. Major markets include construction equipment, mining equipment, trucks (new sales, resale) and buses. Their revenue last year stood at Rs 7888 Cr. They have 654 branches and ~500 partners. The share is trading today (27-Jun-14) at Rs. 895 on BSE.

Why would you consider investing in STFC stock –

1. Very good asset size – total of 53,000 Cr.
2. 35 year old company with very stable and good management
3. Unique business model. No other Financial organization could establish and very low  competition. That’s the reason world’s largest banks to name a few – RBS, HSBC, Barclay’s, Citibank and India’s largest banks – SBI, Punjab National Bank, Bank of Baroda, ICICI Bank, HDFC Bank lend money to STFC.
4.  It has a good asset quality Their NPAs are at 0.8%.
5. After new stable govt, the sectors like mining, transportation and construction. Their growth is directly related to GDP. After new govt, it is generally expected that GDP growth will resume and hence STFC business also would boom. (With no exception to market, this stock has already appreciated by 50% since elections)
6. If inflation is tamed down, RBI will reduce the CRR which will bring down cost of funds for STFC.
7. Analysts expect that STFC’s profits will grow by 20% YOY. If it grows by 20%, shares also would appreciate by 20% every year atleast. If you calculate it will surely double in 5 years on this assumption… that too  taxfree. I am not adding the dividend that is paid at Rs 7/- per share per year.

Risks for investing in STFC –

1. Biggest risk is if the market doesn’t revive and GDP growth doesn’t resume, STFC’s business will not be growing as much.
2.  Currently share market in general has already run up, so there may be a correction in coming months and stock would fall down.
3. If Interest rates continue to hold on the reason of inflation, company may not see as much profits.

You can continue to invest in FD of STFC as its very stable company and risk of loosing money is minimal. Just to note that last financial year STFC raised Rs. 17.5 thousand crores from various banks In fact they are launching NCD at 11.75% on 02-Jul-14 on First come First serve basis. Here is ICICIDirect link It generally gets subscribed in first day or two. All the banks and corporate investor jump on it. 

So you decide and tell me whether it’s smart to invest into shares or FD/ NCD ?