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Shriram Finance’s 4QFY25 reported performance was below expectations primarily due to higher-than-expected NIM compression amid excess liquidity in the balance sheet, which will be deployed in the next couple of quarters. NII was up 9.4% YoY and down 0.4% QoQ - lower than our estimate by 4.8%. Operating profit increased 11% YoY and 6.1% QoQ - in line with estimate on the back of higher non-interest income. PAT grew 9.9% YoY and 2.8% QoQ. Asset quality performance too was below par. The management has highlighted that it was predominantly due to slowdown in the macro environment, which is expected to improve given the strong momentum in the rural economy. The reduction in GNPA was primarily on account of technical write-off of Rs23,451mn of assets, which was fully provided for, leading to a dip in PCR to 43% (PQ: 51.6%). The management expressed confidence in achieving +15% AUM growth for FY26. Shift in the AUM mix towards higher-yielding assets and operating leverage are expected to sustain high RoA over the next couple of years. We are building in AUM/PAT CAGR of 17%/16% over FY25-27E and RoA/RoE of 3.0%/16.4% for FY27E after factoring in slightly higher loan loss provisions and marginally lower disbursements. We continue to assign 2.25x P/ABV on FY27E to arrive at our revised target price of Rs750 (Previous: Rs810). Maintain BUY with an upside of 14% from current levels.

Decent AUM growth given the uncertain macro environment

Shriram Finance reported AUM of Rs2.63tn, up ~17% YoY (+18% ex of write-offs vs. our expectation of 19%) and 3.4% QoQ. Disbursements for 4QFY25 stood at Rs448bn, up 14% YoY and 3% QoQ. AUM growth was witnessed in PV/MSME/FEs/2Ws, which grew 25%/42%/40%/24% YoY. On the other hand, CV/PL YoY AUM growth was lower at 10.9%/7%. Overall disbursement is expected to continue at the same growth rate for FY26. The management continues to guide for high teens AUM growth with focus on bottomline and we have baked in the same.

Operating profit growth lagged AUM growth as liability franchise strengthened

NIM (reported) declined by 46bps QoQ to 9.27% (PQ: 9.73%) primarily due to excess liquidity in the balance sheet. Focus on high yielding portfolio should aid in supporting margin at 9% despite rise in CoF, in our view. Opex increased by 18.6% YoY and 1.7% QoQ, driving C/I ratio to 30.5% as against 29.1% in 4QFY24 and 31.4% in 3QFY25.

Slight asset quality weakness, yet comfortably positioned

Shriram Finance has witnessed an uptick (18bps/Rs9.5bn QoQ) in SMA 2 pool for the second consecutive quarter. But, it still remains comfortable given the coverage (Stage 3 PCR: 43.3%) and the GS1+GS2 print was far lower than historical trends (GS 1+ 2 at 95.4% vs. 94.5% PY). In terms of products, PV/FE/MSME/2W witnessed an increase in Stage 2.

Funding profile is getting diversified and stable; Maintain BUY

Shriram Finance’s CP funding was negligible through FY23, rose modestly to ~1.8% by late FY24, then fell to near 0% by FY25. There has been a declining trend in the share of term loans from banks (from ~24.9% in Q1FY23 to 21.1% by Q4FY25) and NCD (19.1% → 16.4%).. The company has shifted towards a more stable/ alternative funding. Public deposits grew from ~19.7% in Q1FY23 to ~24% by Q4FY25. Securitization also rose (fluctuating ~14–17%). Sub-debt halved as a share (3.3% → 1.1%), indicating trimming high-cost capital. Crucially, ECB borrowing surged (2.9% to 14.4%). Overall, the funding profile of Shriram Finance in FY25 improved in terms of stability and diversity. We are not too worried about normalization of asset quality and continue to maintain Shriram Finance as our top pick in the NBFC space given the relative valuation discount, improvement in the funding profile and healthy growth in a tough environment.

Valuations

We are building in AUM/PAT CAGR at 17%/16% over FY25-27E and RoA/RoE at 3.0%/16.4% for FY27E after factoring in slightly higher loan loss provisions and marginally lower disbursements. We continue to assign 2.25x P/ABV FY27E to arrive at our revised target price of Rs750 (previous: Rs810). Maintain BUY with an upside of 14% from current levels

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