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SHFL reported steady performance in Q2FY25 with AUM, profitability, asset quality, and credit cost coming in line with consensus and our expectations amid a volatile environment. In addition to meeting expectations, the performance was broadly stable to a slight improvement QoQ. There has been good progress on the guided path of ~17-18% AuM growth, and commensurate growth in profit with stable asset quality. Overall, SHFL continued to impress with increasing predictability of its performance. To reflect Q2FY25 performance and external developments, we have tweaked our FY25-27 estimates leading to ~4% earnings cut led by higher borrowing cost and opex. We reiterate our ADD rating on the stock with revised Sep-25E TP of Rs3,500 (from Rs3,700 earlier), implying FY26E P/BV of 2x for SHFL standalone.

Increasing predictability of earnings amid volatile environment

SHFL reported a broadly stable performance in Q2FY25 that met consensus and our expectations on most parameters. The reported NIM decreased by 5bps QoQ as the slightly reduced share of high-yielding segments (PL, Gold, and 2W) led to minor compression in yields. The borrowing cost increased by 1bps QoQ to 8.97%. The asset quality continues to see slight improvement with GS2+GS3 for Q2FY25 reducing by 13bps to 11.92%, and the net provisioning cost in absolute terms being broadly stable at Rs12bn. Opex to AUM saw an increase of 13bps QoQ to 2.95% on account of some increased sourcing cost in a few segments, including 2W loans. Overall, the reported RoA compressed marginally by 6bps QoQ to 3.06%; however, slight increase in leverage helped the RoE to be stable at 16%. The capital adequacy was robust with CRAR of 20.16% and Tier 1 ratio of 19.36%. The company declared an interim dividend of Rs22/sh (Exhibits 1 and 5).

Management confident of maintaining performance momentum

Notwithstanding the turbulences in different lending segments troubling some of the lenders, SHFL’s management is confident of maintaining the current performance momentum and delivering ~17-18% AUM growth with commensurate growth in profit and maintaining of stable asset quality. The cost of borrowing is expected to be sticky in the near term and any benefit will be contingent on the rate cut by the RBI. The management expects the asset quality and credit cost to stay stable and they don’t see any risk of a spike in credit cost. Disbursement growth in Personal Loan, which has been declining in the last few quarters due to recalibration, is expected to pick up in the coming quarters. The company will receive Rs39bn from the closure of Shriram Housing sale process that shall increase its CRAR by 80bps.

Minor tweak to estimates; reiterate ADD with Sep-25E TP of Rs3,500

To reflect Q2Y25 performance and the developments in external environment, we have tweaked our FY25-27 estimates resulting in ~4% earnings cut driven by slightly higher Cost of Borrowings and Opex. We reiterate ADD on the stock, with our revised Sep-25E TP of Rs3,500 (vs Rs3,700 earlier), implying adjusted FY26E P/BV of 2x (Exhibits 2-4).

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