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-      Shriram Finance (SHFL)’s 3Q PAT grew 2% YoY to ~INR18.2b (in line), while 9MFY24 PAT rose ~12% YoY. PPoP was up 12% YoY to ~INR36.9b (in line).

-      NII grew ~17% YOY to INR49.1b (inline). The reported NIM expanded ~5bp QoQ to ~9%, aided by a higher-yielding product mix. Credit cost of INR12.5b (7% higher than MOSLe) translated into an annualized credit cost of ~2.4% (PQ: 2.3% and PY: 2.1%) led by an increase in PCR on S1/S2 loans.

-      Management shared that it does not expect a further rise in its CoB and the higher-yielding products such as PL, 2W, and Gold will continue to grow faster than the CV segment. We model NIMs (on AUM) of 9.2%/9.0%/9.3% for FY24E/FY25E/FY26E.

-      Higher cross-selling opportunities for non-vehicle products and improved distribution of investment and insurance offerings should translate into an AUM and PAT CAGR of ~18% each over FY23-26. This will translate into an RoA/RoE of ~3.2%/~17% in FY26.

-      As a merged entity, SHFL has positioned itself to capitalize on: 1) the diversified AUM mix; 2) improved access to liabilities; and 3) the enhanced cross-selling opportunities. Reiterate BUY with a TP of INR2,700 (premised on 1.6x FY26E BVPS).

AUM rises 21% YoY; strong growth across non-CV product segments

-      Disbursements grew ~29% YoY to ~INR346b, and AUM grew ~21% YoY to INR2.14t. Sequential AUM growth of ~6% was driven by strong growth across non-CV segments like 2W (+17% QoQ), PL (+8% QoQ), Gold (up 9% QoQ), MSME (+8% QoQ) and PV (+5% QoQ)

-      As the non-CV products (like MSME and Gold) continue to get rolled across more branches, we expect the strong disbursement and AUM growth momentum to sustain. We model an AUM CAGR of ~18% over FY23-26E.

Asset quality continues to improve; increase in S1 and S2 PCR

-      GS3/NS3 improved ~15bp QoQ to ~5.7%, while NS3 improved ~10bp QoQ to 2.7%. PCR on S3 improved ~30bp QoQ to ~53%.  SHFL has increased the PCR on S1 loans by ~5bp QoQ and on S2 loans by ~25bp QoQ.

-      Management continued to guide for credit costs of ~2.0%, while our credit cost estimates are marginally higher at ~2.2/2.3% for FY24/25E.

Highlights from the management commentary

-      SHFL targets to keep personal loans (PL) less than 6% of the AUM mix. It has a ~3m eligible customer base for personal loans. Going forward, PL should grow at 20-25%.

-      Shriram Housing needs an equity capital infusion, and SHFL is exploring all possible options for growth capital in the subsidiary.

Valuation and View

-      SHFL reported an operationally healthy quarter with a healthy AUM growth across all its products and delivered a further expansion in NIM. It is yet to fully exploit its distribution network for products like MSME and gold loans. As it does this over the next one year, AUM growth in MSME, PL and Gold loans will continue to remain stronger than other segments.

-      With an expanded geographical presence and a larger workforce, SHFL can leverage cross-selling opportunities to reach new customers and introduce new products, leading to an improved operating metrics and a solid foundation for sustained growth. The current valuation of 1.3x FY26E BVPS is attractive for an 18% PAT CAGR over FY23-26E and an RoA/RoE of ~3.2%/17.0% in FY26E. Reiterate BUY with a TP of INR2,700 (based on 1.6x FY26E BVPS). 

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