Axis Securities has issued a BUY recommendation on Shriram Finance Limited, establishing an ambitious target price of Rs 1,125 per share—representing a compelling 25% upside from the current market price of Rs 902. This bullish stance follows a landmark Rs 39,618 crore strategic investment by Japan's MUFG Bank Ltd., acquiring a 20% stake at Rs 841 per share. The transaction, India's largest foreign direct investment in financial services, validates SFL's formidable position as the nation's second-largest retail NBFC by assets under management while injecting transformative growth capital. The stock has witnessed strong performance after MUFG deal.

Strategic Capital Infusion Reshapes Competitive Landscape

The MUFG Partnership: Shriram Finance has orchestrated a transformative alliance with MUFG Bank Ltd., Japan's preeminent financial institution, through a preferential allotment of equity shares. This transaction, pending shareholder approval and regulatory clearances, represents an extraordinary validation of SFL's operational excellence and governance framework by a distinguished global investor.

The capital infusion emerges as a watershed moment for India's non-banking financial sector. MUFG's investment underscores the robust fundamentals and exceptional growth trajectory of India's lending ecosystem, while simultaneously fortifying SFL's balance sheet resilience. The agreement grants MUFG the prerogative to appoint two nominee directors to SFL's board, ensuring strategic alignment and governance oversight.

Financial Architecture and Balance Sheet Fortification

Capital Adequacy Transformation: Upon deal consummation in FY27, SFL's net worth is projected to surge approximately twofold—escalating from Rs 56,281 crore in FY25 to Rs 1,13,256 crore. This dramatic capitalization enhancement will propel Tier I capital and Capital to Risk-weighted Assets Ratio (CRAR) to substantially elevated levels, furnishing the requisite growth capital for sustained expansion.

The enhanced capital structure positions SFL to deliver assets under management growth at a 17% compound annual growth rate spanning FY26-28E. Critically, this infusion substantially diminishes the imperative for incremental borrowings, while the credible foreign investor's backing augments prospects for a credit ratings upgrade—potentially compressing cost of funds and amplifying margins.

Margin Expansion and Profitability Metrics

Enhanced Return Dynamics: The confluence of improved cost of funds and reduced borrowing requirements is anticipated to drive net interest margins higher by 80-90 basis points across FY27-28E. Coupled with disciplined operating expense ratios and controlled credit costs, these margin improvements are projected to elevate Return on Assets (RoA) to the 3.6-3.8% range over FY27-28E, compared to the earlier estimate of 3.3%.

However, equity dilution accompanying the MUFG transaction will moderate Return on Equity (RoE), settling at 13-15% versus the previous 16-17% projection. Despite this recalibration, the overall profitability trajectory remains decidedly constructive, with net profit forecasted to escalate from Rs 9,424 crore in FY26E to Rs 15,413 crore by FY28E.

Investment Levels and Technical Parameters

Growth Catalysts and Operational Excellence

Segment-Specific Momentum: Demand buoyancy across rural markets and robust growth visibility in commercial vehicle financing and MSME lending segments position SFL advantageously for consistent AUM expansion. The MUFG partnership furnishes SFL with strategic optionality to accelerate growth while maintaining prudent capital adequacy metrics.

The transaction facilitates access to MUFG's extensive customer network, potentially unlocking cross-border transaction opportunities. Furthermore, the alliance aligns seamlessly with MUFG's regional expansion blueprint, targeting India's burgeoning MSME and retail financing segments while contributing to road transport infrastructure development—fundamental to India's economic ascendancy and financial inclusion imperatives.

Revised Financial Projections

Asset Quality and Risk Management

Credit Discipline Maintained: SFL continues demonstrating commendable asset quality stewardship, with net non-performing assets projected to stabilize at 2.5% across the forecast horizon. Provision coverage ratios hovering around 45% reflect prudent risk provisioning practices, while credit costs are expected to remain contained at approximately 2.2% of assets.

The gross NPA trajectory shows marginal improvement, declining from 4.6% in FY25 to an anticipated 4.4-4.5% range through FY28E. This asset quality resilience, juxtaposed against aggressive growth ambitions, underscores management's operational proficiency and risk mitigation frameworks.

Risk Considerations and Downside Scenarios

Cautionary Factors: Despite the overwhelmingly positive outlook, investors should remain cognizant of potential headwinds. A macroeconomic deceleration affecting overall credit momentum could materially impact earnings trajectory. Regulatory impediments in completing the MUFG transaction represent another contingency risk warranting monitoring.

Additionally, the 20% equity dilution, while strategically sound, will moderate per-share return metrics. Post-transaction, promoter holdings will decline to 20.3% from 25.4%, fundamentally altering the shareholding architecture without actual promoter divestment.

Investment Verdict

Recommendation Rationale: Axis Securities reiterates its BUY recommendation with conviction, valuing Shriram Finance at 2.4x September 2027E Adjusted Book Value to derive the Rs 1,125 target price. The MUFG alliance represents an unequivocal endorsement of SFL's business model and governance standards by a globally respected financial institution.