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SHFL registered a steady performance this quarter, marked by in-line AUM growth, improving credit costs, and consistent asset quality; however, the higher new vehicle share, negative carry due to excess liquidity and a strong deposit inflow continued to weigh on margins – albeit expected to normalize over coming few quarters. Asset quality in Q1 was broadly stable, with a minor increase in stage 2 assets (by 40bps QoQ); the management remains confident of rollback due to strong in-house collections, vehicle repossession, and longterm customer engagement which would thus contain the credit cost on assets to under 2%. The management maintains its AUM growth guidance of 15%, supported by product expansion in vehicle branches and improving rural demand on the back of better cashflows, while it expects margins to improve and reach 8.5% by end-FY26 led by moderating CoFs and normalizing impact of excess liquidity. Overall, the steady performance and reiteration of guidance induce us to uphold our estimates and our BUY recommendation, with Jun-26E TP of Rs750, implying FY27E P/B of 1.9x.

Lower credit cost offsets NII softness to deliver steady performance

SHFL reported a broadly in-line performance across most parameters. NIM (reported) remains under pressure on account of excess liquidity and higher new vehicle share at end-Q4 and a 14bps decline QoQ. Incremental provision in credit cost was ~Rs8.38bn, while write-off was ~Rs4.48bn. Overall credit cost on assets for the quarter was ~1.64% vs 2.07% in Q4FY25 and 1.87% in Q1FY25. Asset quality (GS2+GS3) was marginally impacted by GS2+G3 coming at 11.82% in Q1FY26 vs 11.45% in Q4FY25 and 12.05% in Q1FY25 on account of early monsoons. The management expects slippages to reverse in coming quarters.

Growth, margin, and credit cost guidance reaffirmed

The management reaffirmed its 15% overall growth guidance, and expects disbursements to pick up in coming quarters, particularly in the CV and CE segments, which were temporarily hit by early monsoons; non vehicle segments like SME, GL, and PL will continue to fare well. Better monsoons, improving rural cash flows, and stronger economic activity should support this growth. Margins are projected to improve, and reach ~8.5% by end-FY26, as excess liquidity (~Rs100bn) is deployed over the next 3– 4 months and funding costs benefit from the potential rate cuts as well as from the ~40bps revision in the FD rate from Aug-25 onward. Also, the management is confident about maintaining strong asset quality, keeping credit costs below 2% of average assets.

We remain hopeful and reiterate BUY with Jun-26E TP of Rs750

Factoring in the recent performance despite a challenging macro backdrop—and with expectations of better quarters ahead, supported by an above-average monsoon, improving rural cashflow, and improving vehicle demand—we keep our estimates unchanged and maintain BUY; we uphold Jun-26E TP at Rs750, implying FY27E P/B of 1.9x.

Earnings call highlights

• The management indicated that India’s macro environment was positive, with Rural consumption outpacing the overall economic expansion, and helping support the ongoing growth. However, GST collections moderated in June because of the early monsoons, and the auto industry saw mixed trends.
• Total CV sales declined 0.6% YoY (0.22mn units in Q1FY26 vs 0.23mn units in Q1FY25), HCV sales dropped 2.3% (83.8k units in Q1FY26 vs 85.6k units in Q1FY25), LCV sales were steady (0.14mn units in Q1FY26), and passenger vehicle sales contracted by 1.4% (1.01mn units in Q1FY26 vs 1.02 units in Q1FY25). Tractor sales rose 6.3% (0.21mn units in Q1FY26 vs 0.2mn units in Q1FY25), while two-wheeler sales fell 6.2% (4.67mn units in Q1FY26 vs 4.98mn units in Q1FY25) and three-wheeler sales were flat. Construction equipment sales marginally edged down to 28.7k units in Q1FY26 vs 28.9k units in Q1FY26.
• Disbursements: Segment-wise, commercial vehicles remained the top contributor with disbursements of Rs169.2bn, followed by passenger vehicles at Rs81.6bn, MSME loans at Rs63.6bn, gold loans at Rs32.9bn, construction equipment at Rs5.3bn, farm equipment at Rs12.7bn, two-wheelers at Rs30.8bn, and personal loans at Rs22.1bn. Total disbursement for the quarter came at Rs 418.2bn
• MSME growth was muted in Q1, although it is expected to pick up, with overall full-year AUM growth guidance of ~15% intact. There are no asset quality concerns, given the focus on small-ticket lending to the trading and services sectors. Used CV demand remains strong, especially in rural areas, with SHFL gaining share as smaller NBFCs pull back. Passenger vehicles growth is driven by rural demand and upgrade by two-wheeler owners to cars. Gold loan volumes are rising as regulatory easing shifts borrowers from being informal to formal lenders. Construction equipment disbursements dipped due to early monsoons, albeit should recover in H2. Personal loan trends are stable; Q1 softness is seen as temporary.
• The management attributed the marginal rise in Stage 2 assets to the temporary cash flow mismatches caused by the early onset of monsoons. However, it emphasized that this has not led to a rise in credit costs. Most customers are expected to revert to Stage 1, supported by direct engagement, strong in-house collections, and repossessions only when necessary.
• Net interest margin declined to 8.11% in the quarter, primarily due to elevated liquidity levels. However, the management expects NIMs to reach ~8.5% by FY26-end, as excess liquidity of Rs100bn is gradually deployed. New borrowings came in at a lower 8.36% rate, and FD interest rates are cut by 20bps each for May and Jun, and by 40bps for Aug (85% of the borrowings are fixed rate borrowings).
• Cost of funds (CoFs) dropped by 7bps sequentially to 8.88%, and incremental borrowing costs fell further to 8.36%. Loan yields were stable across segments. Despite the marginally higher cost, the management reiterated its preference for a diversified funding mix and may continue with stickier loyal retail deposits – mainly senior citizens.
• The company’s liquidity cushion is still on the higher side—enough to cover five months of repayments. The management targets bringing this down to a more practical 3-month level over the next 3-4 months. The plan is simple: slow down the fresh borrowings and pay off some of the more expensive debt. As there is already enough liquidity on the books, the management does not expect to raise much in Q2 or Q3.
• Q1 fee income dipped due to the absence of a DA transaction (Rs1.7bn in Q4). Commission costs rose on higher deposit mobilization, although they are expected to ease as growth and deposit rates normalize.
• Guidance
• The management maintains overall growth guidance of ~15%
• It expects NIM to inch up and reach ~8.5% levels by the end of FY26
• Credit cost on assets would remain below 2% levels, per management
• The management has no large new borrowings planned in Q2 due to excess liquidity
• The management expects asset quality to improve led by collection efforts, strong customer outreach, and repossession 

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