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Execution better than vehicle finance peers; earnings in line

Despite industry-level stress, its asset quality improves and credit costs remain flat

* Shriram Finance (SHFL)’s 2QFY25 PAT rose ~18% YoY to ~INR20.7b (in line), and PPoP grew 14% YoY to ~INR39.8b (in line). NII grew ~19% YoY to INR54.6b (in line), while reported NIM dipped ~5bp QoQ to ~8.75%. 1HFY25 PAT grew ~18% YoY to INR40.5b and we expect 2HFY25 PAT to grow by ~15% YoY

* Credit costs of ~INR12.3b (10% lower than MOFSLe) translated into annualized credit costs of ~2.1% (PQ: 2.1% and PY: 2.3%).

* Management guided that NIM can be maintained at the current levels or there can be a slight improvement. We model NIMs of 9.1%/9.4% in FY25/FY26.

* SHFL indicated that disbursement and AUM growth will be reasonably good in 2HFY25 as well, and the company guided the CV portfolio to grow at ~17- 18% over the next two quarters. We estimate ~18%/~19% AUM/ PAT CAGR over FY24-27. This will result in an RoA/RoE of ~3.3%/~18% in FY27E.

* SHFL has positioned itself to capitalize on its 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 for a credit rating upgrade. Reiterate BUY with a TP of INR4,000 (premised on 2.2x Sep’26E BVPS).

AUM up 20% YoY; gold and personal loans likely to pick up in 2HFY25

* Disbursements in 2QFY25 grew ~16% YoY to ~INR400b and AUM rose ~20% YoY to INR2.43t. AUM growth of ~4% QoQ was driven by healthy growth across MSME (+12% QoQ), farm equipment (+12% QoQ), and PV (+7% QoQ).

* Personal Loans (PL) growth has moderated, but it expects to embark on PL growth in the near future. MSME was offered in 500 branches prior to the merger, and now it is being offered across 1,000 branches. There has been no change in the ticket sizes, and it is delivering growth in MSME by adding newer customers. Gold loans have declined because it has reduced its LTVs on gold loans to ~60%-65% (v/s 70-73% earlier).

* 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 ~18% over FY24-27E.

Asset quality continues to improve with higher PCR on standard loans

* GS3/NS3 improved ~5bp each QoQ to ~5.3%/2.7%. PCR on Stage 3 rose ~50bp QoQ to ~52%.

* SHFL again increased the PCR on its S1 loans by ~5bp QoQ and on S2 loans by ~30bp QoQ. Write-offs stood at INR4.9b, translating into ~1pp of writeoffs as % of TTM AUM (similar to the last quarter).

* The management guided for credit costs of less than ~2%, while our credit cost estimates are marginally higher at ~2.1%/2.3% for FY25/FY26E.

Highlights from the management commentary

* SHFL is yet to fully start gold loans as per the new guidance/guidelines from RBI. Some of its gold loan business would have gone to the informal sector, but it expects those customers to come back. The company is confident of resumption in gold loan growth from 2HFY25 onwards.

* The company does not see any asset quality risks in its Vehicle Finance business in the near term since used vehicle prices have improved and vehicle repossessions are minimal.

Valuation and View

* SHFL reported an operationally healthy quarter with healthy AUM growth. However, there was a minor NIM compression because of a decline in higheryielding products like gold loans and personal loans. It is yet to fully utilize its distribution network for non-vehicle products. AUM growth in MSME will remain stronger 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 ~1.8x FY26E BVPS is attractive for a ~19% PAT CAGR over FY24-27E and RoA/RoE of ~3.3%/18% in FY27E. Reiterate BUY with a TP of INR4,000 (based on 2.2x Sep’26E BVPS).

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SEBI Registration number is INH000000412