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Shriram Finance consolidated net interest income increased by 1% QoQ/10.6% YoY driven by healthy growth in AuM along with improvement in yields. Operating profit was up by 24% QoQ/26% YoY as employee cost increased on account of merger integration. Following the growth momentum, PAT too grew by 33% QoQ/27% YoY. Along with growth in profit, margins also saw an improvement as operating/PAT margin increased by 455bps QoQ/220bps YoY and 450bps QoQ/160bps YoY.

* AuM growth driven by vehicle segment: The AuM increased by 4.1% QoQ/18.6% YoY which was above management guidance of 14-15% YoY. AuM growth was seen in all segments but passenger vehicles and two wheelers segment stood out with a YoY growth of 29%/20%, respectively. Apart from vehicles, other segments such as MSME and personal loans continued the growth momentum, with YoY growth of 23%/81%. Commercial vehicles have the highest contribution in the AuM at 50.2%, however, the proportion has declined by 197bps YoY as the company looks to diversify post-merger.

* Yields improvement: During the quarter, the company saw an improvement in yields which was driven largely by diversification of the AuM mix. The management iterated that few segments such as personal loans are high yielding as compared to commercial vehicle lending. Therefore, an increase in the portion of such loans led to improvement in yields. Also, new vehicles have lower yield as compared to the used vehicle. The company saw an uptick in demand for new vehicles during the quarter which impacted the yields to moderate slightly.

* Stable asset quality: The asset quality remained overall stable as gross/net stage 3 assets declined by 18bps/23bps QoQ and 24bps/36bps YoY, respectively. The improvement in asset quality was largely due to diversification of the AuM into other loan types. The company remains confident of their unwriting practices and reiterated that all the due diligence is done before lending to any customer. Overall, the management expects the asset quality to remain stable.

* Margin outlook: During the quarter, net interest margin increased by 20bps YoY, however, declined by 23bps QoQ which was attributable to the increase in cost of funds. Going forward, the management expects cost of funds to increase at a moderate pace and expects net interest margins to improve.

* Valuation: We remain positive on Shriram Finance on the back of increasing AuM, diversification of assets and improving margins. The company has a dominant position in second hand CV vehicles with a market share of ~40% and has established moat around itself. Post the merger, it is foraying into other segments which we expect to benefit in the long run. We expect NII/PAT to grow at a CAGR of 20%/24% over FY23-25E. We maintain Buy with a target price of Rs 2,196 valuing the company at 1.4x of its FY25E Adj. BV.

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