Buy Shriram Finance Ltd For Target Rs 1,150 By Emkay Global Financial Services Ltd
SHFL logged a steady performance in Q4, in terms of profitability, margins, and operating efficiency, while AUM grew ~15% YoY. The management indicated that while underlying demand is stable, industry vehicle sales growth could be muted in FY27. However, it is confident of sustaining ~17–18% growth via higher penetration, customer retention, and stronger growth in non-vehicle segments like Gold, while staying cautious in the SME segment amid the ongoing West Asia conflict. Overall margin is maintained at ~8.61%, led by moderation in cost of funds (~10bps QoQ); the mgmt expects margins to be broadly steady with marginal improvement, while passing on some CoF benefit to accelerate growth. Q4 credit cost at 1.9% was above our estimate on account of higher PCR, while asset quality was broadly stable, with the mgmt guiding for gradual improvement as the portfolio mix evolves. The mgmt indicated that the MUFG capital infusion significantly strengthens capital adequacy (~34% pro forma) and provides a strong growth runway. Factoring in the Q4 performance and management commentary, we marginally tweak our FY27–28 estimates which results in 1-6% increase in EPS. We maintain BUY on SHFL while raising our TP by ~5% to Rs1,150 (from Rs1,100), implying FY28E P/B of 2.1x.
Stable quarter led by strong opex control; growth steady
SHFL reported a stable Q4, with a PAT beat on our estimates, primarily driven by lowerthan-expected opex; AUM growth remained slightly soft at ~14.8% YoY (Rs3.02trn), as the management stayed watchful in the MSME segment. Disbursements for the quarter stood at Rs509bn, growing 13.6% YoY and 4.7% QoQ. Margins were broadly stable, while opex moderated sharply with cost-to-income at ~26% versus the normal 30–31% range; this was largely due to a change in the accounting policy for DSA payouts in the TWL segment. Credit cost came in at ~1.9%, almost 10bps higher than our estimates, driven by higher PCR on Stage 3 assets. Overall asset quality was stable with GS3/NS3 at ~4.6%/2.3%, while RoA expanded by ~45bps QoQ, leading to RoE of ~19.1% in Q4FY26.
Reiterates growth outlook while staying mindful of macro uncertainties
The management reiterated confidence in sustaining ~17–18% growth, driven by higher penetration, customer retention, and stronger traction in non-vehicle segments like Gold, while remaining cautious on MSME amid external uncertainties and muted industry trends. It also indicated that Q1FY27 could be relatively soft due to seasonal and macro factors. Margins are expected to be broadly stable with marginal improvement, supported by easing cost of funds and active liability management, with some benefit passed on to customers. Opex, which was lower this quarter due to accounting changes, is expected to normalize toward the 26–27% cost-to-income range. The mgmt remains confident of improving asset quality, which is likely to result in credit cost moderation ahead.
We retain BUY while nudging up Mar-27E TP to Rs1,150
Factoring in the recent performance and outlook, we tweak our FY27-28 estimates (Exhibit 2); retain BUY; raise Mar-27E TP by ~5% to Rs1,150 implying FY28E P/B of 2.1x
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