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Steady quarter led by strong growth; Rerating ahead\

Shiram Finance (SFL) reported a steady quarter with PAT of INR 18.2bn (+3.9% QoQ, +2.3% YoY) which was in line with our estimates led by a) strong AUM growth of (+5.7% QoQ, +20.7% YoY) and b) healthy NII growth (+5.7% QoQ, +15% YoY) with NIMs at 8.99% (+6bps QoQ). AUM growth was driven by PVs (i.e. passengers CVs, which grew 30.8% YoY) as well as erstwhile-SCUF products such as MSME loans (30.3% YoY), gold loans (32.8% YoY) and personal loans (65.4% YoY). Despite a marginal uptick in incremental cost of borrowing to 8.95% (vs 8.7% in 2QFY24), management remains confident of maintaining NIMs at 8.9%. Credits costs inched up marginally to 2.4% of AUM (vs 2.3% QoQ) led by higher PCR on stage 3 assets (+28bps QoQ) to 53.4%. Headline asset quality continues to improve sequentially with GS3/NS3 at 5.66%/2.64% (-13bps QoQ, -8bps QoQ). Management has guided to 2% credit costs for FY24 although it would be fair to expect a normalization of credit costs going ahead. Shriram Housing also contributed positively to the overall performance with PAT at INR 615mn (+27.6% QoQ, +69.1% YoY) and a strong AUM growth of (+11.2% QoQ, +67.5% YoY) - management indicated that they continue to seek optimal value creation options for this business). We believe Shriram's improving growth trajectory led by healthy macros (and thereby a healthy used-CV cycle), benefits of wider distribution of erstwhile-SCUF products, steady return profile stable asset quality should drive further rerating for the stock. We value SFL at 1.6x FY26E BVPS and maintain BUY with a revised TP of INR 2680.

Sustained growth momentum: AUM grew +5.7% QoQ/ +20.7% YoY to INR2.14tn driven by healthy disbursements of INR 377.8bn (+9.2% QoQ, +29.2% YoY). Growth in AUM was led by 2W segment (+16.5% QoQ, +21.3% YoY, followed by gold loans (+9% QoQ, 32.8% YoY), MSME loans (+8.3% QoQ, +30.7% YoY) and personal loans (+7.9% QoQ, +65.4% YoY). Meanwhile, growth across geographies (rural, urban and semi-urban) remained largely secular. Share of PVs in the overall mix continues to inch up (now at 19.4%) while personals loans now stand at 4.6% of the mix. Management indicated that while the board-approved limit for personal loans stands at ~8% of the AUM, they intend to restrict the share to ~6% subject to steady asset quality trends. SCUF products such as gold loans, MSME and 2W still have greater room for distribution scale up and this should aid FY25 growth for Shriram.

Healthy profitability; Stable margins: Operating profits stood at INR 36.9bn (+6% QoQ, +11.7% YoY) driven by a) healthy growth in NII (+5.7% QoQ, +15% YoY), b) higher other income (+101.7% YoY) and c) slower growth in operating expenses (+4.7% QoQ). This led to a steady inline PAT of INR 18.2bn (+3.9% QoQ, +2.3% YoY). Though incremental CoB increased to 8.95% this quarter (vs 8.7% in 2QFY24), NIMs remained stable at 8.99% (+6bps QoQ). Management believes that some shorter tenure and high yield products (gold, 2W and PL) should aid margin performance. SFL’s adept product mix and its ability to pass on any incremental costs, makes management confident of sustaining NIMs at 8.9%.

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CIN Number : L67120MH1986PLC038784