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Strong AUM growth despite elections; earnings in line 

Asset quality improved; continues to build higher PCR on standard loans 

* SHFL’s 1QFY25 PAT grew ~18% YoY to ~INR19.8b (in line) and PPoP grew ~23% YoY to ~INR38.5b (in line).

* NII grew ~25% YOY to INR52.3b (in line). Reported NIM declined ~23bp QoQ to ~8.8% despite a ~5bp decline in CoB. Credit costs at ~INR11.9b translated into annualized credit costs of ~2.1% (PY: 1.9%).

* The management guided for minor NIM expansion, driven by stable CoB and a change in the product mix through focus on shorter-tenor high-yield loans like Gold, PL and 2W. We model NIMs of 9.1%/9.3% in FY25/FY26.

*Higher cross-selling opportunities for non-vehicle products from improved distribution should translate into a CAGR of ~19%/~21% in AUM/PAT over FY24-26E. This will result in RoA/RoE of ~3.3%/~17.6% in FY26E.

* As a merged entity, SHFL is well positioned to capitalize on the diversified AUM mix, improved access to liabilities, and enhanced cross-selling opportunities. The monetization of its stake in Shriram Housing will further help the company improve its capital adequacy, and help it engage constructively with credit rating agencies. Reiterate BUY with a TP of INR3,400 (premised on 2x FY26E BVPS)

AUM up 21% YoY; Non-CV products continue to grow faster than CV 

* In 1Q, disbursements grew ~24% YoY to ~INR377b and AUM rose ~21% YoY to INR2.33t. AUM growth of ~4% QoQ was driven by healthy growth across non-CV segments, like MSME (+10% QoQ), farm equipment (+7% QoQ), and PV (+6% QoQ).

* Personal loans remained muted due to calibrated growth and tighter credit rules, which increased rejection rates. However, the management expressed that this quarter could potentially be the last quarter of decline in personal loans. Gold loans decelerated as the regulator mandated enhanced physical security and infrastructure in new gold loan branches to align with legacy gold loan branches.

* Non-CV products, such as MSME and gold, will gradually be introduced to more branches, and with the resumption of growth in PL and gold loans, we anticipate the momentum to remain intact in disbursement and AUM. We model an AUM CAGR of ~19% over FY24-26E. 

Asset quality continues to improve with higher PCR on standard loans  

* GS3 declined ~5bp QoQ to ~5.4% while NS3 was stable QoQ at 2.7%. PCR on Stage 3 declined ~80bp QoQ to ~51%.  

* SHFL has again increased the PCR on S1 loans by ~15bp QoQ and on S2 loans by ~20bp QoQ. Write-offs stood at INR5b, translating into ~100bp of write-offs as % of TTM AUM (vs. ~90bp in 1QFY24).

* The management guided for credit costs at ~2.0-2.2%, while our credit cost estimates are marginally higher at ~2.1%/2.3% for FY25/FY26E. 

Highlights from the management commentary 

* Elections did not have any significant impact on the overall business momentum since they were spread out across two months. Good monsoons will help to sustain the business momentum.

* SHFL will focus more on short-tenor products (like Gold, PL and 2W) since it is more focused on growing the profit rather than revenue. 

Valuation and View 

* SHFL reported an operationally healthy quarter with healthy AUM growth, whereas NIM declined because of decline in higher-yielding products like gold loans and personal loans. It is yet to fully utilize its distribution network for nonvehicle products. AUM growth in MSME, gold loans and PL will remain stronger than compared to other segments.

* SHFL is effectively leveraging cross-selling opportunities to reach new customers and introduce new products, leading to improved operating metrics and a solid foundation for sustainable growth. The current valuation of ~1.7x FY26E BVPS is attractive for a ~21% PAT CAGR over FY24-26E and RoA/RoE of ~3.3%/17.6% in FY26E. Reiterate BUY with a TP of INR3,400 (based on 2x FY26E BVPS).   

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