Powered by: Motilal Oswal
2025-08-26 12:48:47 pm | Source: Axis Securities Ltd
Buy Shriram Finance Ltd for the Target Rs.750 by Axis Securities Ltd
Buy Shriram Finance Ltd for the Target Rs.750 by Axis Securities Ltd

NIMs to Improve Over H2FY26; Growth Visibility Healthy! Est. Vs. Actual for Q1FY26: NII – INLINE; PPOP – Marginal MISS; PAT – BEAT Changes in Estimates post Q1FY26 FY26E/FY27E (%): NII -1.3/-1.0; PPOP -2.4/-2.7; PAT -4.1/-4.4

Recommendation Rationale

  • NIMs Impacted by Excess Liquidity; CoF Improvement to Drive Expansion: The 14bps QoQ contraction in margins was on account of the negative carry from the excess liquidity carried on the balance sheet. The management has indicated that SFL will look to ease the excess liquidity (by ~Rs 10,000 Cr) over the next 4-5 months, while maintaining liquidity to cover 3 months of liabilities cover vs 5-month cover currently. Thus, easing of excess liquidity should support margins. SFL’s yields across segments have remained largely stable. Thus, apart from easing liquidity, NIMs are expected to find support from the downward repricing of liabilities. The company has seen a sharp improvement in the incremental CoF, declining to 8.3-8.4% vs the current CoF of 8.86%. Furthermore, SFL has slashed its deposit rates by 40bps effective Aug’25, which should augur well from the CoF perspective. The company will look to repay the high-cost borrowings alongside re-aligning the borrowing mix to optimise CoF. Currently, ~85% of the company’s borrowings are fixed-rate, and hence the pass-through of the rate cut benefit could be with a slight lag. Resultantly, the management expects NIMs to improve to 8.5-8.6% by Q4FY25. The NIM improvement trajectory is panning out slower than expected.
  • Increase in Stage 2 Assets Not Worrisome; Credit Costs to be Under Control: The increase in Stage 2 has been primarily owing to unseasonal monsoons causing business disruptions and borrower cashflow mismatch. Given these issues being transient, the management is confident that most of these accounts would be rolled back, and forward flows will not be meaningful. In Q1FY26, asset quality (GNPA/NNPA) has remained largely stable. The management has continued to guide for credit costs of <2% for FY26.
  • Growth Visibility Healthy: SFL’s AUM growth in Q1 was marginally ahead of the management’s guidance of 15% AUM growth. This was primarily led by improved growth in CVs (12/4% YoY/QoQ) and strong growth in PVs (+23/5% YoY/QoQ), Farm Equipments (+46/12% YoY/QoQ) and MSME (+35/4% YoY/QoQ). The company will continue to pursue strong growth in the MSME, PVs, and 2-Wheelers segment, wherein growth visibility remains strong. We pencil in AUM growth of 15% CAGR over FY25-28E, largely in line with management guidance.

Sector Outlook:

Positive Company Guidance: With demand buoyancy in the rural markets and healthy growth visibility across most of the segment, SFL is expected to deliver a consistent and healthy 15% CAGR AUM growth over the medium term. NIMs should find support from the easing of excess liquidity and the gradual downward repricing of CoF. The Opex structure continues to remain fairly lean, and improved productivity should drive a gradual improvement in cost ratios. The increase in GSII is transient, and the management is confident that most of it will roll back in the coming quarters. Thus, forward flow is expected to be minimal, keeping credit costs under control/ SFL is well-placed to deliver RoA/RoE of 3.0-3.2%/16-17% over FY26-28E. Consistent growth delivery while maintaining asset quality alongside NIM improvement on expected lines should drive stock performance. At current levels, we believe the risk-reward is favourable. Current Valuation: 2.2x FY27E BV; Earlier Valuation: 2.3x FY27E BV Current TP: Rs 750/share; Earlier TP: Rs 790/share Recommendation: We maintain our BUY recommendation on the stock

Financial Performance:

? Operational Performance: SFL added 0.16 Mn customers during Q1, taking the total customer base to 9.72 Mn vs 9.56 Mn in Q4FY25. AUM growth was better than expected at 17/3% YoY/QoQ, primarily owing to improved growth in CVs (12/4% YoY/QoQ) and strong growth in PVs (+23/5% YoY/QoQ), Farm equipment (+46/12% YoY/QoQ), and MSME (+35/4% YoY/QoQ). The share of CV loans has remained steady QoQ at 45%.

? Financial Performance: NII grew by 10/3% YoY/QoQ. Margins (reported) contracted by 14 bps QoQ (vs management guidance of margin improvement). This could be owing to the excess liquidity being carried. Yields (calc.) declined by ~3bps QoQ, while CoF (calc.) improved by 7bps QoQ. Non-interest income grew by 49/-45% YoY/QoQ. Opex grew by 21/3% YoY/QoQ, driven by higher employee Opex (+12/8% YoY/QoQ). C-I Ratio stood at 31.7% vs 29.4/30.5% YoY/QoQ. PPOP grew by 8/-3% YoY/QoQ. *Provisions declined by 18% QoQ. Credit costs (calc.) stood at 206bps vs 260bps QoQ. PAT grew by 8/1% YoY/QoQ.

? Asset Quality remained steady with GNPA/NNPA at 4.53/2.57% vs 4.55/2.64% QoQ. Asset quality across segments remained broadly steady QoQ. PCR stood at 44.3% vs 43.3% QoQ. Stage 2 assets have inched up to 7.29% vs 6.89% QoQ.

Key Takeaways

• Growth Visibility Healthy (Contd.): The management has assured that the demand in the used CV segment continues to remain healthy, while the demand in the new CVs is expected to pick up from Aug’25 onwards. The improving rural demand and fast growth of e-commerce in rural and semi-urban areas bode well for LCV growth. The company is also seeing strong demand in the pre-owned PVs, even as demand for entry-level cars continues to remain soft, and there has been a migration towards pre-owned SUVs. The demand buoyancy in the used PV segment from SFL’s core rural and semi-urban markets is on account of (i) no heavy spending on developing public transport networks (barring select metro/Tier I cities) and (ii) opportunity for captive 2-wheeler users to graduate to used cars. In the MSME segment, the company does not see any concerning trends so far. SLF currently caters to lower ticket size customers with limited exposure to the manufacturing sector. A bulk of the MSME exposure is towards trading and services customers, wherein the cash flows are fairly certain. At present, MSME loans are offered through 2/3rd of the company’s branches, and the management plans to expand the distribution to the remainder of the branches in the coming quarters. In Q1, MSME growth slowed down marginally to 4% QoQ vs an average runrate of 8-10% QoQ growth reported over the past few quarters. However, with the onset of the festive season, the management expects demand revival in the MSME segment. In the previous quarter, the management had guided for 15% AUM growth in FY26, driven by a 12-15% growth in the CV portfolio, 20+% in the MSME book, 20% in the PV portfolio and 20% growth in the other segments and has held on to its guidance.

Outlook

We remain confident in SFL’s ability to deliver a healthy AUM/NII/Earnings growth of 15/15/9*% *(incl one time gain in FY25 from stake sale in housing subsidiary) CAGR over FY25-28E, driven by consistent and healthy growth across focus segment, steadily improving NIMs and controlled credit costs supported by a positive outlook of asset quality. We tweak our NII estimates downwards by ~1-2% for FY26/27E, factoring in lower margins. Given sticky Opex and factoring marginally higher credit costs, we trim our earnings estimates by ~4% for FY26/27E each.

Valuation & Recommendation

We value the stock at 2.2x FY27E ABV vs its current valuations of 1.8x FY27E ABV. We arrive at a target price of Rs 750/share, implying an upside of 22% from the CMP. We maintain our BUY recommendation on the stock.

Key Risks to Our Estimates and TP

• The key risk to our estimates remains a slowdown in overall credit momentum, which could potentially derail earnings momentum for the company

 

For More Axis Securities Disclaimer https://simplehai.axisdirect.in/disclaimer-home SEBI Registration number is INZ000161633

Disclaimer: The content of this article is for informational purposes only and should not be considered financial or investment advice. Investments in financial markets are subject to market risks, and past performance is not indicative of future results. Readers are strongly advised to consult a licensed financial expert or advisor for tailored advice before making any investment decisions. The data and information presented in this article may not be accurate, comprehensive, or up-to-date. Readers should not rely solely on the content of this article for any current or future financial references. To Read Complete Disclaimer Click Here