Shriram Finance's long-term prospects intact as merger synergies play out

With one-off costs behind it, performance of NBFC should improve as merger synergies play out

Investors are reviewing the stock of Shriram Finance (SFL) after three major shareholders offloaded their stakes. Piramal Enterprises and TPG sold their entire holding, of 8.34 per cent and 2.65 per cent, respectively, for Rs. 4,824 crore and Rs. 1,390 crore, in that order. Another large investor has sold 3 per cent.

All three were stakeholders in Shriram Capital or Shriram City Union Finance (SCUF) prior to the merger of the three group companies.

Investors had been cautious about these potential sales and this reduces the fear of supply overhangs. Hence, the stock price rose sharply after the three big deals went through, gaining 23 per cent in six sessions before corrections on Thursday and Friday. 

SFL is the largest retail finance non-banking finance company (NBFC) with a strong presence in used commercial vehicle (CV) financing and has a market share of more than 25 per cent in organised CV financing. Unorganised players (with much higher cost of finance and higher interest rates) hold above 50 per cent market share and Shriram and other organised players can undercut them to grow share while sustaining good NIMs (net interest margins). 

The NBFC had a disappointing fourth quarter of the 2022-23 financial year (Q4FY23) due to the merger. Profit after (PAT) was down by 26.4 per cent quarter-on-quarter (QoQ) to Rs. 1,310 crore on account of merger-related intangibles being amortised.

This impacted operating expenditure (Opex) by Rs. 300 crore and also the addition of Rs. 295 crore of provisioning in a one-off measure, following a stress test. 

Assets under management (AUM) growth was at 4.6 per cent QoQ (about 15.9 per cent year-on-year (YoY)) to Rs. 185,700 crore, with 6.2 per cent QoQ increase in disbursements. The management is confident of achieving 15 per cent growth in AUM for FY24.

The NII (net interest income) increased by 2.9 per cent QoQ to Rs. 4,180 crore. The reported NIM on AUM was flat QoQ at 8.55 per cent. Non-interest income declined by 21 per cent QoQ to Rs. 350 crore. The Opex was elevated at Rs. 1,450 crore, up 21 per cent QoQ due to amortisation of intangibles. The cost-to-income ratio rose 530 basis points (bps) QoQ to 32 per cent. 

The company utilised Covid-19 provisions worth Rs. 950 crore and carries additional provisions of Rs. 1,110 crore. The tax rate was elevated at about 30 per cent and guidance is that this will remain in the same zone for two financial years. The liquidity coverage ratio stood at about 209 per cent.

The company carries excess liquidity of Rs. 17,660 crore. Asset quality was stable, and the PCR (provision coverage ratio) stood at 50.1 per cent against 50.7 per cent in Q3FY23. The management guided for a credit cost of 2 per cent. It would focus on tapping local bond markets to raise more cash going forward. 

The merger synergies include portfolio diversification with non-vehicle AUM up to 16 per cent and improving margins due to downward re-pricing of SCUF borrowings. Overall, the merged entity NIM has expanded by 100 bps after merger, driving FY23 return on equity (RoE) to about 16 per cent from a blended 13 per cent pre-merger.

The balance sheet has relatively low leverage (around 5.5x) for a finance company. This aids overall profitability. Mid-term targets include growing non-vehicle AUM to 40 per cent with AUM growing at 15 per cent compound annual growth rate and long run cost-to-income ratio of 25 per cent.

On the NSE, the stock hit a new high of Rs. 1,793 on Wednesday and has corrected to Rs. 1,669 since on Friday. According to Bloomberg, 9 out of the 10 analysts polled in June have a ‘buy’/’overweight’ rating (one is ‘hol’d) with an average target price of Rs. 1,834. Corrections may offer an entry point.