Buy Shriram Finance Ltd For Target Rs.1,155 by Motilal Oswal Financial Services Ltd
Mixed quarter; caution on asset quality clouds near-term outlook Weak monsoonslead to higher slippages & writeoffs; credit cost guidance raised
* Shriram Finance (SHFL)’s 2QFY27 PAT rose ~60% YoY to ~INR36.8b (in line). NII in 2QFY27 grew ~40% YoY to INR84.1b (in line). Other income grew ~15% YoY to INR4.2b (~8% lower than our est.).
* Opex grew ~4% YoY to INR20.2b (~9% lower than MOFSLe). The cost-toincome ratio dipped ~290bp QoQ to ~22.9% (PQ: 25.9%/PY: 30.5%). SHFL expects its C/I ratio to remain at ~25% and Opex/AUM at ~2.5% over the medium to long term. We model the C/I ratio at 24-25% over FY27-28.
* PPoP grew 53% YoY to ~INR68.1b (~7% beat). Credit costs stood at ~INR18.8b (~20% higher than MOFSLe) translating into annualized credit costs of ~2.35% (PQ and PY: 1.9%).
* Management moderated its FY27 AUM growth guidance to ~15-17% from ~18% earlier, factoring in weak monsoons and uncertainty arising from the West Asia conflict. Despite healthy demand over the past two quarters, SHFL remains cautious in drought-affected states such as Maharashtra, Karnataka, and Telangana, where it has a sizeable portfolio.
* SHFL indicated that credit costs could rise temporarily by 30-40bp over the next one or two quarters due to seasonal stress in affected geographies, but they are still expected to remain below ~2.3% for FY27. Elevated stress is mainly attributable to deficient rainfall and seasonal pressures in select regions, with no evidence of widespread portfolio deterioration. Lower agricultural output could weigh on rural incomes, consumption, and borrower cash flows in the coming quarters. The asset quality outlook for the company remains cautious amid these near-term headwinds.
* We tweak our FY27/FY28 EPS estimates to factor in higher credit costs, offset by higher NIM and lower opex. We expect SHFL to deliver a CAGR of ~18%/~31% in AUM/PAT over FY26-28E, along with RoA/RoE of ~4.1%/ 13.7% by FY28. We reiterate our BUY rating with a TP of INR1,155 (premised on 2x Sep’28E BVPS)
AUM rises ~17% YoY; disbursement growth healthy
* Disbursements grew 25% YoY to INR541b in 2QFY27. AUM stood at INR3.29t (slightly higher than our estimates) and grew ~17% YoY/4.9% QoQ. AUM growth was strong across CV, PV, gold loans and personal loans, while growth in CE, farm equipment, and 2W remained relatively weak during the quarter.
* Management shared that the strong disbursement growth in MSME was supported by expansion beyond its traditional southern and western markets to a pan-India presence following the merger. The company expects MSME lending to outpace growth in other segments. We anticipate disbursement/AUM growth of 19%/17% in FY27.
Highlights from the management commentary
* Management shared that moisture stress has affected rice, soybean, maize, cotton, and pulses, while fertilizer shortages amid West Asia-related disruptions could further pressure food supply.
* The company highlighted that weak monsoons are weighing on rural consumption, particularly entry-level two-wheelers and cars, discretionary FMCG, and consumer appliances. However, diversification into non-farm and allied activities, greater irrigation coverage, and lower rainfall dependence have improved rural resilience.
Valuation and view
* SHFL delivered a mixed quarter, with PPoP beating estimates on the back of higher NIM and lower opex, while earnings were in line owing to higher credit costs. AUM growth at 17% YoY was stronger than our estimate; however, credit costs increased amid higher slippages and write-offs, primarily reflecting drought-like conditions across multiple states in India. Hence, management raised its FY27 credit cost guidance and lowered its AUM growth outlook.
* The stock is currently trading at 1.5x FY28E P/BV. We expect SHFL to deliver a CAGR of ~18%/~31% in AUM/PAT over FY26-28E, along with an RoA/RoE of ~4.1%/13.7% in FY28. We reiterate our BUY rating with a TP of INR1,155 (premised on 2x Sep’28E BVPS).
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