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Shriram Finance (SFL) reported a strong AUM growth of INR 1.93trn (+4% QoQ) led by healthy disbursements of INR 305bn (+21% YoY, -1.9% QoQ). NII came in at INR 44.4bn (flat QoQ, +5% JMFe) even as NIMs declined by -23bps QoQ at 8.3% primarily due to healthy loan growth. PPoP stood at INR 31.3bn (+1.5% QoQ) led by -4% QoQ decline in opex. Lower credit costs of INR 8.8bn (1.9% of AUM vs 2.6% QoQ) led to healthy PAT of INR 16.8bn (+28% QoQ). Asset quality improved sequentially with Gross stage 3/ Net stage 3 at 6.03%/2.96% by -17bps/-23bps QoQ respectively. PCR on stage.3 improved +240bps QoQ at 52.5%. Mgmt. remains confident on sustaining growth, though will revisit guidance post 2QFY24. Despite the recent rally in the stock, we believe the valuations still remain favourable basis its enhanced presence across pan-India and diversified portfolio mix postmerger. The stock trades at 8.2x P/E and 1.2x P/BV on FY25e. We value SFL at 1.4x/9.6x FY25e P/BV and P/E and maintain BUY with a revised TP of INR 2,130.

* Growth outlook improves: In 1Q24, disbursements were healthy at INR 305bn (+21% YoY, -1.9% QoQ). As of 1QFY24, AUM stood at INR 1.93trn (+4% QoQ), led by PV (+7% QoQ,+28% YoY), MSME (+5% QoQ, +24% YoY), Personal loans (+19% QoQ,+81%YoY). Growth was across all the geographies (rural, urban and semi-urban). Mgmt. remains confident on sustaining growth, though will revisit guidance post 2QFY24. We expect SCUF’s portfolio to grow at a faster pace (especially MSME, GL and PL), thus leveraging SFL’s wide spread network and cross selling opportunities. On an overall basis we expect AUM growth of 18% CAGR over FY23-25E.

* Strong profitability: NII stood at INR 44.4bn (flat QoQ, +5% JMFe) despite decline in reported NIMs by -23bps QoQ at 8.3% primarily due to healthy loan growth. PPoP stood at INR 31.3bn (+1.5% QoQ) led by -4% QoQ decline in opex. Lower credit costs of INR 8.8bn (1.9% of AUM vs 2.6% QoQ) led to healthy PAT of INR 16.8bn (+28% QoQ). Mgmt. has guided for the cost of funds to move up marginally while they continue to scale up high yield products in the portfolio.

* Asset Quality outcome - positive: Asset quality improved sequentially with Gross stage 3/ Net stage 3 at 6.03%/2.96% by -17bps/-23bpsQoQ respectively. PCR on stage.3 improved 240bps QoQ at 52.5%. The company plans to add further provisions in PL book (to move PCR from 47% to 50% in couple of quarters). We build avg credit costs of 279bps for FY24/FY25.

* Healthy subsidiary performance – Shriram Housing Finance (SHF): SHF reported healthy PAT growth at INR 456mn (+51% YoY, +23% QoQ) led by strong NII growth of (+41% YoY, +28% QoQ). PPoP stood at INR 701mn (+61% YoY, +97% QoQ). AUM growth was robust at INR 95.4bn (+64% YoY, +18.5% QoQ) led by sharp increase in LAP growth (+94% YoY, +33% QoQ). HL grew (+57% YoY, +5% QoQ) and Top up loans grew (+59% YoY, +13% QoQ). Gross stage 3 was up marginally by +7bps QoQ at 1%. PCR healthy at 24.8%.

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