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Shriram Finance (SFL) PAT declined 26% QoQ to Rs13bn, led by higher opex (amortization of intangibles - all of FY23 impact was clubbed in 4Q itself) and higher credit costs (led by assumption changes in PD/LGD). AUM grew 5% QoQ - CV +3% QoQ, MSME 8% QoQ, Personal loans 16% QoQ. NIMs stood at 8.55% vs 8.52%bps QoQ led by higher cost of funds. Mgmt remains confident of containing credit costs at ~2% levels for FY24 and deliver 3% RoA guidance on a sustainable basis. We build avg credit costs of 274bps for FY24/FY25. While acknowledging the near-term miss on earnings, we maintain our FY24/FY25 earnings estimates given continued improvement in growth (17% CAGR FY23-25 in AUMs), benign credit environment. SFL trades at inexpensive valuations of 6.4x P/E and 0.9x P/BV on FY25e and offers an attractive entry point from a medium term perspective. We value SHF at 1.2x/8.5x FY25e P/BV and P/E and maintain BUY with TP of INR1875.

* One-offs lead to 4Q earnings miss: SFL undertook an annual exercise of stress testing leading to change in PD/LGD assumptions resulting in variance of INR 2.95bn account in 4QFY23. Additionally, opex remained elevated on account of 303cr impact of amortization of intangible assets (~INR 15bn amortized over a 5 year period; run rate of INR 0.75bn each quarter) recognised entirely in 4Q23 for FY23. NIMs stood at 8.55% vs 8.52%bps QoQ led by higher cost of funds. Mgmt. has guided that NIM trajectory may experience slight headwinds due to the impact of repo rate hikes over last few quarters.

* Merger integration issues behind; growth visible: In 4Q23, disbursement were healthy at INR 310.5bn (+6.2% QoQ,) driven by CV/PV/MSME at INR 121.8/55.9/35.7bn. As of 4QFY23, AUM stood at INR 1.86trn (+5% QoQ, 18% YoY), led by PV (+7% QoQ,+26% YoY), MSME (+8% QoQ, +21% YoY), Personal loans (+16% QoQ,+82% YoY). Going forward, we expect SCUF’s portfolio grow at a faster pace leveraging SHTF’s wide spread network and cross selling opportunities. Mgmt. expressed that two wheeler segment has seen a slow down in southern region and incrementally the company plans to focus and tap northern geographies with higher demand along with gold loans witnessing sluggish growth. Geographically, urban and semi-urban AUM grew faster at +13% and 8% QoQ in contrast to rural witnessing a depressed growth (-0.3% QoQ). On an overall basis with successful completion of merger integration we expect benign credit environment with continued improvement in growth (17% CAGR FY23-25 in AUMs). Asset quality saw an improvement with GNPA/ NNPA at 6.21%/3.06% by -8/-1bps respectively. We build avg credit costs of 274bps for FY24/FY25.

* Maintain BUY with TP of INR 1,875: SHTF’s pan India presence as one of the leading CV financers and SCUF’s diversified bouquet of products are expected witness continued growth momentum. While acknowledging the near-term miss on earnings, we maintain our FY24/FY25 earnings estimates. SFL trades at inexpensive valuations of 6.4x P/E and 0.9x P/BV on FY25e and offers an attractive entry point from a medium term perspective. We value SHF at 1.2x/8.5x FY25e P/BV and P/E and maintain BUY with TP of INR1875.

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