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Sustained strong show

Another quarter of solid performance 

Shriram Finance delivered an in-line AUM growth, stable NIM and stronger-thanexpected asset quality performance in Q2 FY25, underpinning sustained delivery of 3%+/15%+ RoA/RoE. Disbursement traction remained brisk (up 6% qoq/15% yoy), driving a sturdy AUM growth (4% qoq/20% yoy). The loan portfolio growth continued to be driven by Used CV (Disb/AUM up 7% qoq/2% qoq), Used PV (Disb/AUM up 3% qoq/7% qoq), MSME (Disb/AUM up 11% qoq/12% qoq) and Farm Equipment financing (Disb/AUM up 10% qoq/12% qoq). Calibration of LTVs has been impacting disbursement/book growth in Gold Loans. Sustenance of sturdy collections has been supporting benign new delinquency creation and forward flows. Persistent recovery efforts and buoyancy in used vehicle prices are underpinning healthy NPL resolution momentum. Marginal decline in the levels of Stage-3 and Stage-2 assets, stable writeoff and steady ECL coverage drove lower-than-expected credit cost of 2.1%.

Growth outlook sanguine; current margin and credit cost can be sustained

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 a couple of 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 even in next year. 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 significant people. Further AUM mix shift towards relatively higher yielding products (MSME, Used PV & FE) and a gradual decline in incremental CoF can support a firm margin delivery in ensuing quarters. Management expects Stage-3 assets to decline to around 5% level with expected strong kharif harvest/realizations and improved load/utilization of vehicle in Used CV segment.

Relative strong performance would re-rate valuation

Shriram Finance has demonstrated strong and consistent execution on growth and asset quality fronts since H2 FY23, and we expect this to continue in the medium term. We estimate 15-16% AUM CAGR and 17-18% earnings CAGR over FY24-27 with average RoA/RoE delivery of 3.5%/17%. Stock’s valuation (1.8x P/ABV and 10x P/E on FY27 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 increased 12m PT of Rs3700.

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