Moderate valuation, growth triggers augur well for Shriram Finance stock

Shriram Finance’s (SHFL’s) profit after tax (PAT) rose 10 per cent year-on-year (Y-o-Y) to ₹2,140 crore in the fourth quarter of the financial year 2024-25 (Q4FY25).

 

The FY25 PAT (excluding exceptional gain) grew 15 per cent Y-o-Y to ₹8,270 crore. The Net Interest Income (NII) in Q4FY25 grew 9 per cent Y-o-Y to ₹5,570 crore. However, high credit costs at ₹1,560 crore translated into annualised credit costs of 2.4 per cent. The asset quality deteriorated and net slippages continued to remain elevated at ₹1,400 crore versus ₹1,200 crore in Q3FY25.

 

The stock reacted badly, falling 5.2 per cent to close at ₹621.85 on Monday on the BSE. Many analysts believe this is transient. The yields on loans can be calculated to be up about 5bp quarter-on-quarter (Q-o-Q), while overall, spreads compressed by 25bp Q-o-Q. Reported NIM (net interest margin) dipped 25bp Q-o-Q to 8.25 per cent, due to high liquidity on the balance sheet.

 

Management guides liquidity to normalise in the next two quarters. SHFL undertook a technical write-off of ₹2,350 crore in Q4FY25, which was P&L neutral but led to an improvement of 85bp in Gross Stage 3 loans (GS3) to 4.55 per cent. After adjustment for the write-offs, GS3 rose 3bp Q-o-Q.

 

Gross Stage 2 (GS2) rose 20bp Q-o-Q. Management does not anticipate further increase in stress or credit costs in FY26 and is confident there will be no significant flows from GS2 to GS3 pool in Q1FY26.

 

SHFL expects the overall credit situation to improve, with an increase in urban demand and in rural activity. SHFL guided for AUM growth of 15 per cent+ in FY26 (unchanged) and expects the cost-to-income ratio to decline to 27-28 per cent by end-FY26.

 

The company may be able to further utilise its distribution network for non-vehicle loans. The PCR (provision coverage ratio) on GS3 declined 8pp Q-o-Q to 43 per cent. Management does not expect GS3 PCR to increase, but it may stay in the range of 43-45 per cent. Management is guiding for credit costs of 2 per cent in FY26. A shift in product mix to high-yielding non-CV products will be margin accretive. 

 

Surplus liquidity was ₹3,100 crore. SHFL expects liquidity to normalise to ₹1,800-1,900 crore by the second half of FY26. Declining interest rates support NIM expansion. The availability of used vehicles and the volume of used vehicle transactions are expected to increase from FY27. Some rural segments in Chhattisgarh, MP, and Bihar, had poor collections due to the slowdown but the situation has improved there, and further deterioration in asset quality is not likely, according to management.

 

There was healthy growth in assets under management (AUM) and disbursements. NIMs may expand more as excess liquidity normalises. SHFL is leveraging cross-selling opportunities to reach new customers and broaden the product mix.

 

The Expected Credit Loss (ECL) cover for SHFL is better than most peers at 5.6-6 per cent of AUM. 

 

But asset quality is a key monitorable. Investors should assume some increase in credit costs over FY26 and reduce their EPS projections accordingly. The gold loan portfolio is showing little growth which is surprising, given rising prices of gold.

 

SHFL’s loan book includes a fixed-rate portfolio which benefits a lot from falling rates. Yields have improved by 15-20 bps in the last two quarters, and may continue to expand. Cost of funding should have peaked given falling rates. Term loans and securitised loans comprise 37 per cent of borrowings and public deposits comprise an additional 24 per cent. Management guided for stable spreads.

 

If interest rates continue to trend down and there is a recovery in urban vehicle demand, the company is very well-placed. Also, if its efforts at cross-selling, using its extensive distribution network is successful, it would diversify its loan book. The valuations seem moderate. Target prices from various analysts indicate that there could be a 15-20 per cent upside.