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Uptick in top-line growth: Shriram Finance Net Interest Income (NII) in Q2FY24 was Rs 4,969 Cr with a growth of 8.5% QoQ/18.8% YoY. NII growth was mainly led by improvement in yields as the interest income increased by 6.8% QoQ/16.6% YoY to Rs 8,909 Cr. Interest expense remained moderate as the company managed its cost of funds effectively with a growth 4.8% QoQ/13.8% YoY to Rs 3,839 Cr.

Margins improvement continues: Net Interest Margin (NIM) during the quarter improved by 60bps QoQ/67bps YoY to 8.9%. The NBFC company has managed to sustain its margin as compared to peers in the environment of interest rate hikes. The management expects that such margin will continue going forward and expects NIM to be in the range of 9-9.5%. The margin improvement was also led by change in product mix

Passenger vehicles driving AuM growth: AuM saw a healthy growth of 4.9% QoQ/19.7% YoY at Rs 2,02,641 Cr which was driven mainly by passenger vehicles growth of 9.4% QoQ/32.3% YoY. Commercial vehicles which constitute highest share of AuM mix saw a moderate growth of 2.6% QoQ/12.3% YoY. Commercial vehicles share in the overall AuM mix declined by 166bps QoQ/319bps YoY to 48.6%. The management expects moderate growth of Commercial vehicles going forward at 12 -15% YoY while other segments will continue to see high growth. Post the merger, Personal loan segment during the quarter increased by 11.6% QoQ/73.3% YoY. The management expects AuM growth to sustain and guided growth of 18-20% in the next quarters.

Operating efficiency and profitability: Core operating profit increased by 10.2% QoQ/15.7% YoY to Rs 3,461 Cr as the company managed its costs efficiently. Cost to income ratio declined on QoQ basis by 166bps to 25.7%. PAT saw a growth of 4.6% QoQ/12.9% YoY to Rs 1,789 Cr as the company increased its provisions by 28.4% QoQ/26.4% YoY. The company expects costs to moderate going forward which will improve margins and increase profitability. RoA/RoE remained healthy at 3.1%/15.4%.

Asset quality improves: Asset quality on both segmental basis and on group level remained healthy. Gross/net stage-3 assets declined by 52bps QoQ/YoY to Rs 5.8%/2.8%. The company remains cautious in lending to the new customers. It disburses majority of personal loan to existing customers so that it is familiar with the behaviour of customers.

Valuation: We remain positive on Shriram Finance on the back strong growth in AuM, growth of high yielding segments and uptick in margins. The management remains positive on the growth path going forward and expects AuM growth as well as margins to sustain. It also marching towards technological development by launch of various digital initiatives and also partnering with fintech companies such as Paytm to widen its reach and provide superior user experience. We expect NII/PAT to grow at a CAGR of 16%/24% over FY23-25E. We maintain Buy rating with a target price of Rs 2,196 valuing the company at 1.4x of its FY25E Adj. BV.

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