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Above expectations on growth and margins

Shriram Finance delivered a 1.5-2% beat in NII/PPOP on the back of stronger-thanexpected growth and a resilient margin performance. Asset quality/portfolio construct continues to improve even after adjusting the write-offs. Earnings were marginally below estimate as credit cost was higher on higher growth and shift in loans mix whereas write-offs remain regular. ECL coverage witnessed a slight increase on Stage1 and Stage-2 assets. The collection efficiency remains firm depicted in controlled new delinquency creation and forward flow. Headline Stage-3 and Stage-2 assets level improved further. Co. continues to deliver 3%+/15%+ RoA/RoE.

AUM growth accelerates to 21% yoy; co. confident of sustaining momentum in Q4

On the back of strong overall disbursements of Rs378bn (up 9% qoq/29% yoy), the AUM grew by 5.7% qoq/20.7% yoy. While traction in CV financing (up 4% qoq/13% yoy) and used PV financing (up 5% qoq/31% yoy) was steady, products like MSME Loans (up 8% qoq/30% yoy), Gold Loans (up 9% qoq/33% yoy) and 2W Loans (up 16.5% qoq/21% yoy) witnessed growth acceleration. Even PL portfolio growth remained strong at 8% qoq/65% yoy. Management expects 20% AUM growth in FY24 and 15% growth in FY25.

Growth in used PV financing was driven by strong demand in Tier 2 & 3 towns, increased distribution, and ATS/value growth. MSME financing is receiving fillip from calibrated roll-out in CV branches even as ATS and loan tenors have been stable. In Gold Loans, the co. has substantially ramped-up distribution through introduction in CV branches. PL traction in being driven by cross-sell to current and erstwhile 2W customers and to repeat borrowers.

Margin improves on sequential basis; co. expects steady NIMs

NIM improved 6 bps qoq to 8.99% even as funding cost increased expectedly by 10 bps. Portfolio mix shift towards better-yielding MSME Loans, Gold Loans, 2W Loans and PLs, and lagged impact of rate hikes taken in preceding 6-12 months underpinned the improvement in portfolio yield. Incremental funding cost was slightly higher in the quarter at 8.97% due to change in borrowing mix, focus on higher duration and increased pricing of deposits. Management sees steady NIMs in coming quarters, as the increase in funding cost after RBI’s risk weight changes would likely get offset by sustained faster growth in higher-yielding products. Further, the co. can protect margins through rate hikes.

Headline asset quality improves; management continues to guide for 2% credit cost

There was a mild reduction in the level of Stage-2 and Stage-3 assets. Grossing up for the usual write-offs, the Stage-3 assets increased only marginally in absolute terms, a trend which has been consistent over past few quarters. Stage-2 assets have also been stable for the past three quarters. Thus, delinquency creation and forward flows have been pretty normal. Besides write-off, the credit cost in the quarter was driven by higher growth and loan mix shift towards erstwhile SCUF products.

Significantly upgrade Target Price; Maintain BUY and prefer the co. over peers

We upgrade 12m PT to Rs2800 on rolling over target multiple to FY26. Our earnings estimate for FY24/25 are largely unchanged with better growth and margin assumptions getting offset by inching-up of trend credit cost. Shriram Finance, the merged entity, is a multi-product play having synergistic growth at disposal; and the management has demonstrated the execution in recent quarters. We expect 17% AUM CAGR and 21% earnings CAGR over FY23-26 with average RoA/RoE delivery of 3.4%/17%. Despite recent run-up, stock’s valuation is reasonable at 1.5x P/ABV and 8x P/E on FY26 estimates. Shriram Finance remains our preferred pick in vehicle finance coverage. Likely capital raise/stake sale in Shriram Housing would discover holding value for Shriram Finance and open some additional upside in the stock.

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