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SHFL’s Q4FY25 results were mixed – credit cost was elevated causing a PBT miss, which was offset by lower tax rate that led to in-line PAT. This was due to temporary factors: i) Reported NIM dropped by 23bps QoQ to 8.25%, largely on excess liquidity of ~Rs120bn owing to large ECB loans raised in Dec-24 and Q4. ii) SHFL technically wrote-off Rs23.45bn of loan fully provided for; this led to GS3/NS3 of 4.55%/2.64% in Q4 vs 5.38%/2.68% in Q3, and PCR drop to 43.3% from 51.6% QoQ. iii) The slightly elevated credit cost may have seen impact of the portfolio stress-testing scenario outcomes. These now being behind, the gradually reducing excess liquidity and falling-rate environment should support NIM ahead, and credit cost stabilize a tad lower vs Q4FY25; this would lead to ~15% AUM growth and RoA/RoE of ~3%/16% in FY26E. To reflect Q4 developments/outlook, we tweak our FY26-27 estimates that slightly reduces our NII/NIM and increases our credit cost; hence we cut EPS by ~5%. We maintain BUY and Mar-26E TP of Rs750 (implying FY27E P/B of 1.9x).

PAT misses our estimate on higher credit costs from a technical write-off

SHFL’s Q4 results were mixed with PAT of Rs 21.3bn (vs our estimate of Rs21.7bn), which came in below our estimate. This was mainly on account of elevated credit cost, which was due to technical write-off of Rs23.5bn and stress in some geographies. Margins were also impacted, due to negative carry from the excess liquidity that was owing to ECB raise. Opex moderated QoQ and the mgmt expects such opex moderation to continue; it guided to cost-to-income of 27-29%. Total provision in credit cost was ~Rs15.97bn, while provision write-back was Rs16bn. Overall credit cost for the quarter was ~2.07% and the management expects it to be moderate and remain below 2% going forward.

Reaffirms outlook for both, growth and stable asset quality

The mgmt reaffirmed its 15% overall growth guidance, with the CV segment expected to grow 12–13%, and MSME and other segments above 20%. The mgmt noted that a better monsoon, increased government capex, and improving economic activity could lead to its guidance being exceeded. Margins are projected to improve, as excess liquidity is deployed and funding costs benefit from rate cuts. Operating expenses are expected to remain elevated due to continued investments in brand building, infrastructure, and capacity, with a medium-term cost-to-income guidance of 27–29%. The mgmt remains confident of maintaining strong asset quality and keeping credit costs below 2% of average assets, with possibility of further improvements as rural cashflows strengthen.

Some revision in estimate; reiterate BUY and Mar-26E TP of Rs750

To reflect the Q4FY25 performance and developments in the external environment, we marginally tweak our FY26-27 estimates which results in 1) cut of ~2-4% in our disbursement and ~1% in AUM growth; 2) a 4-5% cut in earnings over FY26-27; 3) marginal elevation in credit cost. These three key factors combined would result in RoA contraction of ~20bps in FY26-27E. We reiterate BUY and Mar-26E TP of Rs750, implying adjusted FY26E P/BV of 1.9x.

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