Growth guidance and margin recovery positive for Shriram Finance

SHFL's Q1FY26 net rose 9% year-on-year with stable credit costs, strong disbursement trends and margin guidance of 8.5% by Q4 despite high liquidity on the balance sheet

Shriram Finance (SHFL) reported a stable Q1FY26. It reported net profit growth of 9 per cent year-on-year (Y-o-Y) and 1 per cent quarter-on-quarter (Q-o-Q), with return on assets (RoA) at 2.5 per cent and return on equity (RoE) at 15 per cent during the period. Disbursement growth moderated to 11 per cent Y-o-Y, leading to assets under management (AUM) growth moderation to 17 per cent Y-o-Y and 3 per cent Q-o-Q.

 

The net interest income (NII) growth was low at 10 per cent Y-o-Y and flat Q-o-Q, as net interest income (NIM) (calculated) was down 35 basis points (bps) Q-o-Q due to excess liquidity on the balance sheet. Credit cost was down 15 bps Y-o-Y and down 50bps Q-o-Q despite expected credit loss (ECL) coverage rising 10bps Q-o-Q. The net profit met consensus estimates at ₹2,160 crore (up 9 per cent Y-o-Y and 1 per cent Q-o-Q).

 

The gross stage 3 (GS-3) assets were stable (down 2bps Q-o-Q), but GS-2 was up 63 bps Y-o-Y and 39 bps Q-o-Q due to seasonal factors. Provision coverage ratio (PCR) on GS-3 rose 103bps Q-o-Q to 44 per cent. The management reiterated AUM growth guidance of 15 per cent, with lower than 2 per cent credit cost (as per cent of assets), and margin recovery to 8.5 per cent by Q4FY26 (40bps higher than Q1FY26). 

 

The lower NIM reflects higher balance sheet liquidity. On a 1-year basis, GS-3 loans moderated to 5.6 per cent from 7 per cent and the company expects to reduce GS-2 loans in autos over the next few months. The trends in MSME loans where there’s been 40 per cent growth rate in two years are key monitorables given GS-3 of 4.1 per cent in the segment. 

 

The company says it has been cautious in two-wheelers (up 24 per cent in FY25), as delinquencies inched up. Reported NIM was down 15 bps Q-o-Q, as period-end liquid assets increased to ₹39,000 crore from ₹36,000 crore. Management hopes to reduce excess liquidity by ₹10,000 crore over time.

 

The company cut fixed deposit (FD) rates. The cost of borrowings was down 8 bps Q-o-Q (15-20 bps for higher-rated players) and a combination of the above two factors led to NIM cuts. A small rise in credit costs is likely. The AUM was up to ₹2.7 trillion, with disbursements of ₹41,800 crore (up 11 per cent Y-o-Y and down 7 per cent Q-o-Q). There was traction in farm equipment (up 46 per cent Y-o-Y and 12 per cent Q-o-Q), MSME (up 35 per cent Y-o-Y and 4 per cent Q-o-Q) and passenger vehicles (up 23 per cent Y-o-Y and 5 per cent Q-o-Q). Other segments such as two-wheeler loans (up 23 per cent Y-o-Y), personal loans (up 15 per cent Y-o-Y) and commercial vehicles (up 12 per cent Y-o-Y) also saw healthy momentum, while gold loans (up 7 per cent Q-o-Q) benefited from a shift towards the organised sector. The construction equipment portfolio declined (down 12 per cent Q-o-Q) due to a steep drop in disbursements (down 76 per cent Q-o-Q).

 

SHFL reported NII of ₹5,900 crore (up 10 per cent Y-o-Y, flat Q-o-Q). Given incremental cost of finance at 8.36 per cent and 40bps reduction in deposit rates expected by August, margins may start to improve towards the target of NIM of 8.5 per cent by Q4. On the funding side, 85 per cent of borrowings are fixed-rate, while 100 per cent of assets are fixed-rate, creating a minimal asset-liability mismatch. SHFL continues to maintain a 3.8 per cent provisioning buffer on Stage 1 & 2 book, while total ECL cover at 5.7 per cent of AUM.

 

The steady AUM growth, credit costs, and asset quality are positives, but the higher new vehicle share, negative carry due to excess liquidity and strong deposit inflow depress margins. The reiteration of guidance offers confidence.