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Strong growth in a weak environment

Shriram reported strong performance in 1QFY25 aided by robust AUM growth (up 21% YoY and 4% QoQ) and healthy return profile with RoA (calc) at 3.3%. NII was up 25% YoY and 3% QoQ (5% above est). NIMs (on AUM, calc) declined 13bps QoQ to 9.1% was due to change in product mix. Going ahead, some margin improvement can be expected. Operating profits increased 23% YoY and down 1% QoQ (5% above our estimates) while PAT grew 18% YoY and 2.0% QoQ (6% ahead of our estimates). Asset Quality continues to improve further. The management expressed confidence in achieving upwards of 15% AUM growth for FY25. Regarding the quarterly performance, the management highlighted that there was no substantial impact of election and hence credit offtake was good. Owing to a robust economic environment, a shift in AUM mix towards higher-yielding assets, and operating leverage is expected to drive a 20-30bps expansion in RoA over the next couple of years. The sale of the housing subsidiary, anticipated to be completed by February 2025, SFL is set to receive Rs3,900cr from the sale, resulting in an increase in CRAR by ~80 bps. We build in AUM/PAT CAGR at 16%/19% over FY24-26E and RoA/RoE at 3.4%/16.4% for FY26E. We maintain BUY on the stock with a TP of Rs3480 by assigning 2.25x P/ABV FY26E and an upside of 19% from current levels.

AUM growth remains robust

Shriram reported AUM of Rs2.33tn, up 21% YoY and 4% QoQ. Disbursements for 1QFY25 stood at Rs377.0bn, up 24% YoY and down 4% QoQ. Strong AUM growth was witnessed in PV/MSME/Gold loans which grew 27%/44%/23% YoY. CV AUM grew 14.4% YoY while Farm Equipment’s registered sequential improvement of 7%. Disbursements in PL was down 11% YoY while AUM increased 13% YoY. Management reiterated guidance of 15- 18% AUM growth with focus on bottom line.

Operating profit growth strong led by controlled opex

NIMs (reported) decline by 23bps QoQ to 8.79% (PQ 8.33%). NIMs on AUM (calc) declined 13bps QoQ to 9.1% due to change in product mix. Focus on high yield portfolio should aid in supporting margins at 9%, despite rise in CoF, in our view. NII came in at Rs52.3bn (up 25% YoY and 3% QoQ) and above our estimates by 5% and other income came in lower at Rs2.5bn declined by 22%/41% YoY/QoQ. Opex was controlled and increased by 17% YoY and 2% QoQ driving C/I ratio to 29.7% as against 30.8% in 1QFY24 and 29.1% in 4QFY24. Operating profit growth was strong which increased by 23.3% YoY

Asset Quality continues to improve

Loan loss provisions at Rs11.9bn, up 35% YoY and down by 6% QoQ. Credit cost (on AUM) for 1Q stood at 2.1% (PY: 1.9%, PQ: 2.3%). Gross Stage 2 and Gross Stage 3 assets improved further to 6.7%/5.4% as against 7.9/6.0% in 1QFY24 and 6.8%/5.5% in 4QFY24. Management maintained credit cost guidance at 2.0%. Write-offs (as % of opening loans) for 1QFY25 were at 1.1% (annualized). Stage 3 PCR was at 51.1% (PY: 52.5%, PQ: 51.8%). Credit cost on BS loan recorded 2.2% (PY: 2.0% & PQ: 2.5%).

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