Strong guidance positive for Shriram Finance on robust Q2 performance

Shriram Finance delivered a better-than-expected Q2FY26, with stronger margins, stable credit costs, and improving vehicle and MSME trends, supporting a confident outlook for the rest of the year

Shriram Finance (SHFL) posted a beat on estimates for Q2FY26, with good growth and improved asset quality.

 

There was improved net Stage-3 and reduced non-performing loans (NPLs).

 

Credit cost remains moderate at well under 2 per cent of average assets under management (AUM), which is the guidance target for FY26.

 

The guidance was confident and stable for volume growth driven by market share gains and hopes of better demand in H2FY26.

 

While AUM growth guidance is unchanged at 15 per cent, the management believes AUM growth for FY26 would surpass the guidance.

 

AUM growth was good across used commercial vehicles (CV), used passenger vehicles (PV) and even micro, small and medium enterprises (MSMEs) with AUM up 7 per cent in H1F26.

 

The improved growth in vehicles implies market share gains. An enhanced distribution network resulted in MSME growth.

 

The management expects better demand driving vehicle volumes, along with more market share gains. There is a limited positive impact of goods and services tax (GST) cuts.

 

On financial performance, net interest income (NII) was up 4 per cent quarter-on-quarter (Q-o-Q) and 12 per cent year-on-year (Y-o-Y) to ₹6,270 crore.

 

The net interest margin (NIM) improved by 8 basis points (bps) Q-o-Q to 8.2 per cent with a decline in incremental cost of finance (CoF) and utilisation of the excess liquidity overhang.

 

This changes a trend of declines for the previous five quarters.

 

Given chances of excess liquidity being further normalised, CoF should drop.

 

The NIM may climb to 8.5 per cent by Q4FY26-end. Net profit was up 7 per cent Q-o-Q and 11 per cent Y-o-Y at ₹2,070 crore. This translated into a return on assets (RoA) of 2.9 per cent and return on equity (RoE) of 15.4 per cent.

 

Analysts are upgrading growth expectations and NIM assumptions with some upgrading earnings for FY27. The key monitorable is asset quality. If that improves meaningfully, there would be valuation upgrades.

 

Gross Stage-2 fell 37 bps Q-o-Q to 6.92 per cent in Q2FY26 and GS-3 increased marginally to 4.57 per cent (4.53 per cent in Q1FY26).

 

The CV portfolio (46 per cent of AUM) and PV portfolio (21 per cent of AUM) are showing improving asset quality. The Stage-2 in CV, PV, farm equipment and MSME segments saw sequential declines.

 

This performance comes in a challenging environment and the management says it is confident of maintaining credit cost at below 2 per cent in FY26. It does not foresee major risks in CV and MSME portfolios.

 

The overall AUM growth (aggregate ₹2.81 trillion) dropped to 15.7 per cent Y-o-Y in Q2FY26.

 

The management highlighted that exposure to the MSME segment (about 14 per cent of AUM) is mainly in trading and small-ticket loans.

 

The MSME Stage-3 rose 49 bps Q-o-Q to 4.61 per cent.

 

The management says the MSME portfolio exposure to the US is minimal, so asset quality is not at great risk.

 

New CV prices have held up well and Shriram has not seen much correction in vehicle prices in the last month (post GST cuts). This is because auto manufacturers reduced discounts post GST cuts, offsetting the benefits.

 

The management pointed out that there may have been lower disbursements in Q2 as customers deferred purchases waiting for GST cuts.

 

Farm equipment disbursements were lower by 25 per cent Q-o-Q. Credit demand remains very strong in PV/2W segments and in H2FY26 AUM growth may accelerate to 17 per cent.

 

The management is confident about two-wheeler demand being much stronger in October 2025.

 

The CoF should come down further, as it focuses on raising deposits. 

 

The stock has done well for the last three-four months and it rose slightly on results and guidance.

 

The confident guidance and hopes of an improving macroenvironment have given rise to optimism.