Buy Shriram Finance Ltd for the Target Rs 1,235 by Motilal Oswal Financial Services Ltd
NIM expansion and lower credit costs drive earnings AUM up 15% YoY; exudes higher confidence in accelerating MSME and PL
* Shriram Finance’s (SHFL) 1QFY27 PAT rose ~60% YoY to ~INR34.4b (~5% beat). NII in 1QFY27 grew ~33% YoY to INR77.1b (~7% beat). Other income grew ~36% YoY to INR5b (~35% lower than est.).
* Opex grew ~9% YoY to INR21.2b (in line). The cost-to-income ratio (C/I) was stable QoQ at ~25.9% (PQ: 26% and PY: 31.7%). SHFL expects its C/I ratio to remain broadly stable over the medium term despite branch expansions. We model the cost-income ratio at 25-26% over FY27-28.
* PPoP grew 45% YoY to ~INR60.9b (inline). Credit costs stood at ~INR14.6b (in line), translating into annualized credit costs of ~1.9% (PQ/PY: 1.9%).
* SHFL maintained its ~18% AUM growth guidance for FY27 and plans to reassess the outlook after 2QFY27, once there is greater visibility on monsoon trends and rural demand. While the CV portfolio is expected to grow at ~15%, MSME and Gold Loans are likely to grow at a faster pace.
* The company aims to increase the contribution of MSME and Gold loans to its overall portfolio, with the MSME mix targeted to rise to ~20% (from ~13-14% currently), while Gold loans in the AUM mix are expected to increase to ~5% (from ~2.5% now).
* Management highlighted that despite elevated fuel prices amid West Asia tensions, vehicle operators have largely been able to pass on the higher costs to customers, keeping operating margins broadly stable. Vehicle demand also remains healthy, with no meaningful increase in vehicle idling or signs of stress observed. Management reiterated its credit cost guidance of <2% over the medium term. We model credit costs of 2.1% each in FY27/FY28 (vs. 2% in FY26).
*We raise our FY27 EPS estimate by 7%, factoring in higher NIM following the equity infusion from MUFG and marginally lower credit costs. We expect SHFL to deliver a CAGR of ~18%/~29% in AUM/PAT over FY26-28E, along with RoA/RoE of ~4%/13.5% by FY28. Reiterate BUY with a TP of INR1,235 (premised on 2.2x FY28E BVPS).
AUM/disbursements grow 15%/20% YoY
* Disbursements grew 20% YoY to INR500b in 1QFY27. AUM stood at INR3.14t (in line) and grew ~15% YoY/3.8% QoQ. AUM growth was strong across CV, PV, Gold loans and Personal loans, while growth in CE, Farm equipment, MSME, and 2W remained relatively weak during the quarter.
* Management expects AUM growth of ~15–16% in 2QFY27, with growth momentum potentially accelerating thereafter, subject to the broader macro environment. We anticipate disbursement/AUM growth of 19%/17% in FY27.
Valuation and view
* SHFL delivered a healthy quarter, with earnings beat driven by NIM expansion and sequentially stable credit costs. While asset quality witnessed a marginal seasonal deterioration amid higher slippages, management remains confident of sustaining its growth trajectory and maintaining asset quality in FY27 despite the uncertain geopolitical environment.
* SHFL is among our top picks in the NBFC sector, and the healthy growth momentum will be supported by resilient vehicle finance demand and increasing contribution from higher-growth segments such as MSME, PL. and gold loans. Stable NIM (after equity infusion), supported by lower incremental CoF, should provide further support to profitability.
* The stock is currently trading at 2x FY27E P/B. We expect SHFL to deliver a CAGR of ~18%/~29% in AUM/PAT over FY26-28E, along with RoA/RoE of ~4%/13.5% in FY28. Reiterate BUY with a TP of INR1,235 (premised on 2.2x FY28E BVPS).
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