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Positives priced-in, all eyes on credit costs

Strong growth, steady margins drive profits   

Shriram Finance’s (SHFL IN) healthy Q3 earnings stood in-line led by: a) steady margins (mere 4bps increase QoQ) at 9.78%, on shift in product mix to high-yielding assets (2W/gold/MSME/PL share up to 24% of book, with 20%+ yields) and calculated CoF declining ~20bps QoQ and b) robust business traction (disbursement up 9% QoQ/29%YoY) offsetting provisions spike of 11% QoQ. Post robust growth performance, medium-to-longer term outlook should that be of steadying performance, characterized by: (a) 15-16% annual growth, led by non-CV business segments, (b) NIM settling at 8.6%, (c) favorable credit cost (2.0% versus 2.4% in Q3FY24), RoE at 16%. We monitor each business contour in the ever-changing sectoral terrain.   

Best of growth trajectory peaking out

SHFL’s sturdy 21% YoY growth was the best part of Q3 performance. While passenger vehicle (PV) financing growth (5% QoQ) was robust, led by tier II/III demand, new CV financing growth trumped traditional used CV financing, attributed to price inflation and upgradation of used vehicle customers. SHFL continues to maintain market share in used CV financing. High-yielding businesses, viz., two-wheeler (17% QoQ), personal loans (up 8% QoQ), gold loans (9% QoQ), and MSME (8% QoQ) drove overall traction. While medium-term visibility is well-fortified with upbeat performance in 9MFY24, FY25-26 growth guidance is resumed to 15-16% annual growth. Moreover, given volatility in elections period and trade-offs between credit costs and growth, the underlying momentum should remain in check.

Absolute NPAs spike; credit costs spike but may steady

Q3 GNPA was historically at its lowest at 5.66%, down 13bps QoQ/63bps YoY on a high growth base. Q3 saw sequential spike in absolute stage 3 and 2 assets each by 3%. Credit costs spiked to 2.4% versus 2.3% in Q2 albeit management guidance was at 2% ahead. Notable observations in Q3 are write-offs declining 16% QoQ to INR 7.3bn, farm equipment, commercial vehicle (CV) and personal loans (PL) reporting 9%/6%/6% NPAs. The management is not wary of PLs as these are to existing 2W and CV customers for business consumption.    

Re-rating behind, upside capped; revise to Accumulate

SHFL’s valuation re-rating led by better growth and asset quality is behind. While SHFL does not expect volatility around elections, its growth trajectory has peaked out and credit costs at 2% are at risk with mix tilting to 2W/MSME/PL/passenger vehicle (as there will be trade-offs between write-offs and reported NPAs). Margins should moderate a bit with limited ability to transmit high costs ahead, propping growth. So, RoEs should settle at best to slightly over 16% and RoAs at 3-3.1% in FY24-26E. Upside potential is capped to 16% – Revise to Accumulate from Buy as we value SHFL at 1.7x FY25E P/ABV arriving at raised TP of INR 2,540 (earlier INR 2,152).

Please refer disclaimer at Report
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