Buy Shriram Finance Ltd For Target Rs.860 By Axis Securities Ltd
Recommendation Rationale
* Growth Outlook Strong: SFL delivered healthy growth of 16/3% YoY/QoQ, primarily owing to improved growth in CVs (+14/4% YoY/QoQ) and strong growth in PVs (+22/5% YoY/QoQ), MSME (+26/5% YoY/QoQ) and Farm Equipments (+38/6% YoY/QoQ). The management remains optimistic about growth trends sustaining, driven by strong growth seen in Oct’25. SFL’s H2 AUM growth is likely to be 200 bps over Q2 growth, driven by demand buoyancy in the 2-Wheelers and CV segment as the benefit of GST rate rationalisation flows in. In Q3, the 2-Wheelers and PV segment is expected to witness strong growth. We expect SFL to deliver a steady ~16% CAGR AUM growth over FY26-28E.
* NIMs Improve as Excess Liquidity Eases: SLF’s 8 bps NIM improvement was aided by utilisation of excess liquidity, which currently stands at normalised levels, equivalent to 3 months (vs 5 months in Q1) of liability repayments. Furthermore, the company’s incremental CoF stands at 8.07% vs the overall CoF of 8.83% (down 12 bps QoQ) in Sep’25. Thus, downward repricing of CoF should help support margins. The management has reiterated its exit-NIM guidance of 8.5%, while margins are likely to settle at 8.25-8.3% for FY26. SFL intends to maintain margins at current levels despite incrementally financing new vehicles, as margins are expected to be protected by declining CoF. SFL will look to optimise the mix of borrowings to maintain CoF.
* Asset Quality Stable; Credit Costs to be Under Control: The truck utilisation levels have been steady in rural and urban markets alike; however, certain geographies that witnessed excessive rainfall have seen temporary challenges, thereby delaying payments. In response, the company has accommodated some customer requests and offered relief measures. SFL remains cautious in the SME segment, with customers, especially manufacturers, facing headwinds due to US tariffs. So far in Oct’25, SFL has not seen an adverse impact of the tariffs and the rationalisation of GST rates has enabled SMEs to divert production towards domestic markets. SFL has been able to maintain stable asset quality and control credit costs in H1. We expect FY26 credit costs to settle at ~2.2% (+/-10 bps) and at similar levels over FY27-28E.
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