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Diversified retail consumer play at compelling valuations

* Birth of a diversified retail consumer play: The lending business of the Shriram Group, re-christened ‘Shriram Finance’ (SHFL), post the merger of Shriram Transport Finance (SHTF) and Shriram City Union Finance (SCUF), was listed on the exchanges with effect from 20 December, 2022. SHFL is a diversified, retail-financing play, with AUM of ~Rs1.7Tn and presence across the lower-than-prime lending spectrum, spanning across CV/CE and two-wheeler financing, small-business finance, gold loans and the fast-growing affordable-housing business (housed within its HFC subsidiary, Shriram Housing Finance - SHFC). We estimate SHFL’s AUM to grow at 14-15% over FY22-25E, driven by two factors: 1) Vehicle Finance, which constitutes two-thirds of the portfolio, is expected to benefit from the current CV upcycle; 2) Improved cross-sell opportunities for the erstwhile SCUF products over the much-enlarged SHFL distribution network.

* Aspirations for the business: Management has, as part of its vision for SHFL, laid out a diverse set of qualitative & quantitative goals. SHFL aspires to become the country’s preferred financial-services destination, focusing on new-to-credit customers with a crosssell based strategy. Management has also indicated its aspirations w.r.t operational metrics, such as: 1) AUM growth of ~15%; 2) NIM of ~8%; 3) GS3 and NS3 of ~6% and ~3%, respectively; and 4) RoA of ~3%, translating into RoE of ~16%. In our assessment (Exhibit 7), SHTF with ~20% market share of the CV/CE business was hitherto constrained to broadly grow at the sector-averages. By merging the SCUF product lines with itself, SHTF has added profitable (with RoA >RoA of SHTF) growth drivers, which can function as additional levers of growth/profitability while navigating through business cycles.

* Utilization of merged distribution network offers growth opportunity: SHFL holds a consolidated AUM across vehicle loans and small-business loans as well an impressive, fast-growing, affordable-housing portfolio. As of Sep-22 (Exhibit 5), CVs constituted ~56% of the SHFL portfolio, followed by ~17% for passenger vehicles and ~10% for SME loans. Housing loans (originated at SHFC) accounted for ~4% of the overall portfolio. Access to the combined Shriram network of 2,875 branches across the country (Exhibit 11) will help to leverage cross-sell opportunities such as expanding the gold loan, small-business loan and affordable-housing loan offerings to the erstwhile SHTF branches. Coupled with this, the ongoing CV upcycle provides strong tailwinds to the CV financing business. We estimate overall AUM growth of 14-15%, for SHFL, over the forecast period, with earnings growth of ~22%, RoA of ~2.8% and ~RoE of ~15% by FY25E.

* We have a BUY rating on the stock, with a rolled over Dec-23E TP of Rs1,700 (earlier Rs1,610), arrived at using the sum-of-the-parts methodology, valuing: i) Shriram Finance (standalone) at Rs1,600/share using the excess return on equity (ERE) method, which implies a Dec-24E P/BVPS of 1.24x; ii) Shriram Housing Finance at Rs101/share, assigning a multiple of 2.6x to the Dec-24E BVPS. Key risks to our estimates: challenges in integration of product lines/culture across businesses.

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