Buy Shriram Finance Ltd for the Target Rs 1,220 by Motilal Oswal Financial Services Ltd
Beyond the CV franchise; multiple growth engines emerging
Diversification and borrowing cost gains to drive the next leg of earnings growth
* The macro backdrop has turned more challenging, but we see the current pressure as cyclical. Higher crude prices, elevated bond yields, and uneven monsoon trends could weigh on rural cash flows and transporter incomes in the near term. However, Shriram Finance’s (SHFL) diversified franchise, resilient asset quality, and strong underlying demand provide a cushion against these headwinds.
* Growth is broadening beyond the core CV franchise. While CV remains the anchor, new-vehicle financing, MSME, and gold are emerging as meaningful incremental growth engines. New-vehicle financing has already risen to ~16% of disbursements from ~10% earlier, with management targeting 20– 25% over the next 2–3 years. We estimate an 18% AUM CAGR over FY26– 28.
* MUFG partnership is changing the economics of the franchise. The ~20% strategic stake strengthens capital availability while enabling a structural improvement in funding costs. SHFL expects borrowing costs to decline by ~1pp over the next 2–3 years, supported by rating upgrades, liability repricing, and better access to debt capital markets.
* Lower CoF and operating leverage can drive meaningful earnings expansion: We expect NIM to expand to ~9.2%/~9.1% in FY27/FY28, while the cost-to-income ratio should decline from ~30% in FY26 to ~26% by FY28. This supports our expectation of ~29% PAT CAGR over FY26–28, with RoA rising to ~4% by FY28.
* Asset quality remains resilient but is the key near-term monitorable. Stage 2/3 trends have remained broadly stable despite seasonal weakness and the challenging macro backdrop. We expect credit costs to remain contained, although rural cash flows, fuel prices, and monsoon/El Niño trends warrant close monitoring.
* SHFL has corrected ~11–12% over the past month amid a combination of factors, including renewed escalation in the West Asia conflict, a sharp rebound in crude prices, elevated bond yields, and weaker-than-expected monsoons. Monsoon trends have added another layer of uncertainty, with cumulative rainfall YTD ~12% below the long-period average and the spatial distribution of rainfall suggesting drought-like situations in certain states, including Maharashtra and Bihar. These factors could have a second-order impact on rural cash flows, agricultural activity, and transporter incomes.
* The stock is currently being impacted by factors that are largely macro and near-term in nature, while several of the company's structural earnings drivers, such as higher growth capacity, lower incremental cost of funds (aided by credit rating upgrade), and product diversification, are only beginning to play out. We expect SHFL to deliver a CAGR of ~18%/~29% in AUM/PAT over FY26-28, along with RoA/RoE of ~4%/13.5% by FY28. Reiterate BUY with a TP of INR1,220 (premised on 2.2x FY28E BVPS).
MUFG partnership to improve funding economics and unlock new opportunities
* The MUFG partnership strengthens both SHFL’s balance sheet and competitive positioning: MUFG’s ~20% stake provides substantial capital headroom, with management indicating that the existing capital base can support growth for the next ~4–5 years. This reduces the near-term need for another large primary capital raise and provides greater flexibility to invest in emerging growth opportunities.
* Lower funding costs should improve SHFL’s ability to compete in new vehicle financing: Historically, relatively high funding costs constrained the company’s ability to compete aggressively in new vehicles. The improving funding profile is now enabling SHFL to expand in this segment and deepen customer relationships by allowing borrowers to graduate from used to new vehicles within the Shriram ecosystem.
* MUFG also provides access to a broader Japanese corporate ecosystem: Potential relationships with corporates such as Suzuki, Toyota, Honda, Yamaha, Denso, and Hitachi could create opportunities beyond vehicle financing, including supply chain finance, equipment financing, manufacturing, and rural/semi-urban ecosystems. While these opportunities are still evolving, the strategic relationship could expand SHFL’s addressable market over time
Valuation and view
* We remain constructive on SHFL’s medium-term earnings trajectory, supported by three structural drivers: diversification, lower funding costs, and operating leverage. We forecast ~18% AUM CAGR and ~29% PAT CAGR over FY26–28, with RoA improving to ~4% by FY27/FY28.
* Insurance distribution is a relatively small component of SHFL’s fee income, and commission on insurance distribution accounted for only ~1.8% of PPoP and ~0.1% of avg. assets in FY26. Hence, any change in insurance distribution commissions should have limited direct impact on SHFL’s overall earnings, providing greater earnings resilience amid potential changes in insurance distribution regulations.
* Near-term macro volatility could delay the pace of earnings improvement, but does not alter the medium-term earnings framework. The combination of a stronger capital base, broader product franchise, and structurally improving borrowing costs should enable SHFL to compound earnings as operating conditions normalize. Reiterate BUY with a TP of INR1,220 (based on 2.2x FY28E BVPS).
* Key risks:
a) Impact on rural cash flows due to weak monsoons and El Niño impact
b) increase in fuel costs impacting transporter incomes due to elevated crude prices
c) increase in repo rates due to elevated inflation, leading to higher incremental CoF.
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
