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Post-merger, opportunities to cross-sell non-vehicle product offeringsimprove

* As a merged entity, Shriram Finance (SHFL) has strategically positioned itself to capitalize on several advantages. These include: a) diversified AUM mix; b)improved access to liabilities; and c) enhanced cross-selling opportunities.

* With a legacy of over four decades, SHFL has exhibited its execution capabilities across multiple credit and economic cycles. Shriram group appointed five Jt. MDs on the business side (three from SHFL and two from SCUF) ofthe merged entity. All these five Jt. MDs are long-tenured veterans from the Shriram group.

* SHFL has successfully expanded its offerings with the rollout of gold loans and personal loans, and it has also extended its 2W franchise across branches. The company plans to tread cautiously on MSME loans, wherein it will first gain a deeper understanding of the respective micro-markets before scaling up.

* The merged entity is now rated AA+ by both CRISIL and India Ratings. Although our investment thesis does not depend on a change in credit rating, we believe SHFL now has a strong case to work with the credit rating agencies for an upgrade. A credit rating upgrade is an option value, which can help SHFL moderate its borrowing costs by 40-50bp.

* The strong demand for CVs is likely to continue, supported by government’s infrastructure spending and healthy real estate activity.

* Our earnings estimates are unchanged. Higher cross-selling opportunities for nonvehicle products and improved distribution of investment and insurance offerings should translate into an AUM/PAT CAGR of 14%/15% over FY23-25E. This should further result in an RoA/RoE of 3.1%/15.0% in FY24E/FY25E. Reiterate BUY with a TP of INR2,100 (based on 1.4x FY25E standalone BV).

Diversified loan mix; strong loan growth in the non-vehicle products

* The erstwhile CV business of Shriram Transport now contributes ~78% to SHFL’s AUM mix with the balance coming fromnon-CV products of SCUF. In the near term, we expect the CV portfolio (erstwhile SHFLbusiness) to report a 12% CAGR, while the SCUF portfolio would register a 21% CAGR. Combined, we forecast SHFL’sAUM to clock a CAGR of ~14% over FY23-FY25.

* The change in mix towards the higher-yielding non-CV products will also be marginally accretive to the blended yields. A considerable proportion of this improvement in yields is expected to be driven by the higher proportion of personal loans and MSME loans in the AUM mix.

Strong ability to sustain margins with benefits on both asset and liability fronts

* SHFL’s customer segment offersit the pricing power and allows it to steer clear of any irrational pricing in the marketplace. Occasionally, SHFL has struggled to access liabilities, but ithas always been able to pass on the higher borrowing costs to its customers, with little impact on its margins.

* Post-merger, it will reap the re-pricing benefit on the SCUF portion of the liabilities (as and when they come for maturity/renewal). If the company achieves an upgrade from the credit rating agencies, it can benefit SHFL’s borrowing costs by an additional ~40-50bp. Moreover, with 2W and Gold Loan products (short-tenured) in the AUM mix, the company can also borrow through commercial papers (CPs) as there is some stability in the debt capital markets at present.

* We estimate NIM on AUM at 9.1%/9.0% in FY24/FY25 (v/s 9.4% in FY23) without considering any positive impact on the credit rating of SHFL.

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