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Another quarter of steady performance

Shriram Finance delivered an in-line growth, softer NIM and stronger asset quality performance versus our expectations. Disbursement momentum (up 24% yoy) remained robust, underpinning a sturdy AUM growth (4% qoq/21% yoy). Growth was driven by continued traction in Used PV (book up 6% qoq/27% yoy) and MSME (book up 10% qoq/44% yoy) and revival in Farm Equipment financing (book up 7% qoq/17% yoy). Negligible impact on collections from heatwaves and elections led to benign new delinquency creation and forward flows. Persistent recovery efforts and buoyancy in used vehicle prices is underpinning sustained NPL resolution momentum. Mild decline in the level of Stage-3 and Stage-2 assets, stable write-off and steady ECL coverage drove lower-than-expected credit cost of 2.1%. Company continues to deliver 3%+/15%+ RoA/RoE.

Growth outlook sanguine; company set to surpass 15% growth guidance

At individual product level, the growth outlook for Shriram Finance remains healthy-tostrong. In the largest business segment of Used CV financing (~48% of AUM), growth levers would continue to be 1) dominant market position (sustained market share gains in gradually formalizing market), 2) lesser competition in mainstay 5-10 years old vehicle finance segment (~80% of used CV disbursements) and 3) value growth (would help for few more quarters). Growth in used PV has been stronger than used CV aided by solid traction/demand for used Buses and used Cars, and the management is confident about such growth sustaining for a couple of years. MSME financing portfolio is receiving growth fillip from roll-out in CV branches, even as ATS and loan tenors have been largely stable. The product has been rolled out in ~120 CV branches so far and would be introduced in another 250 branches in next two years. In Gold Loans, the co. has substantially ramped-up distribution through introduction in 800+ CV branches and addition of ~3500 people. Sharpened operational focus and the significant increase in gold price would also aid growth in this product.

Expect 20% earnings CAGR over FY24-26; valuation to re-rate further

Shriram Finance has demonstrated strong and consistent execution on growth and asset quality fronts since H2 FY23. Further AUM mix shift towards relatively higher yielding products (MSME, Gold Loans & 2Ws) is likely to support stable margin delivery in ensuing quarters. We expect 16% AUM CAGR and 20% earnings CAGR over FY24- 26 with average RoA/RoE delivery of 3.4%/17%. Despite recent rally, stock’s valuation (2x P/ABV and 10.7x P/E on FY26 estimates) is palatable in the context of envisaged growth/RoE delivery. Shriram Finance remains our preferred pick in vehicle finance coverage. We reiterate BUY with 12m PT of Rs3420.

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