Top Conviction Ideas : Buy Shriram Finance Ltd for Target Rs.750 - Axis Securities Ltd
* NIMs Impacted by Excess Liquidity; CoF Improvement to Drive Expansion: The management has indicated that SFL will look to ease the excess liquidity (by ~Rs 10,000 Cr) over the next 4-5 months, which 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 40 bps effective Aug’25, which should augur well from the CoF perspective. It will look to repay the high-cost borrowings alongside re-aligning the borrowing mix to optimise CoF. Currently, ~85% of its 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.
* 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.
* Increase in Stage 2 Assets Not Worrisome: 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.
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