Motilal Oswal Financial Services has reiterated its BUY recommendation on Shriram Finance (SHFL), assigning a target price of Rs 1,175, implying an upside potential of nearly 29% from the current market price of Rs 913. The brokerage believes the company's transformational partnership with MUFG, stronger capital position, declining funding costs, and expanding retail lending franchise could significantly accelerate earnings growth over the next few years. With improving margins, stable asset quality, stronger operating leverage, and growing penetration in rural and semi-urban India, Shriram Finance appears well positioned to deliver robust profitability and sustainable growth. Motilal Oswal expects healthy AUM expansion and strong earnings compounding through FY28.

Motilal Oswal Reaffirms BUY Call on Shriram Finance

Investment Recommendation: Motilal Oswal has maintained its BUY rating on Shriram Finance with a target price of Rs 1,175. The brokerage views the company as one of the strongest retail-focused non-banking financial companies (NBFCs) in India, supported by its dominant rural franchise, diversified lending portfolio, and disciplined risk management framework.

The brokerage expects the company's enhanced capital position and improving profitability profile to create a favorable platform for accelerated growth over the medium term.

MUFG Partnership Creates a New Growth Chapter

A transformational capital infusion: One of the most significant developments for Shriram Finance has been the strategic investment by Japan-based MUFG. The transaction involves a capital infusion of approximately USD 4.4 billion in exchange for nearly a 20% stake in the company.

This partnership is expected to:

Strengthen the balance sheet substantially.
Improve funding flexibility.
Enhance access to global treasury expertise.
Support liability diversification.
Accelerate digital capabilities.

Management expects medium-term Assets Under Management (AUM) growth to rise to approximately 18-20%, compared with the company's historical growth rate of around 15-16%.

Rural India Remains the Core Growth Engine

Deepening penetration rather than aggressive expansion: Unlike several competitors chasing urban markets, Shriram Finance continues to focus on underserved rural and semi-urban regions across northern, eastern, and central India.

The company believes these markets still offer substantial financing opportunities with relatively lower competitive intensity. This strategy allows Shriram Finance to leverage its extensive branch network and long-standing customer relationships while maintaining superior underwriting standards.

The approach also strengthens customer retention and creates multiple cross-selling opportunities across lending products.

Vehicle Finance Continues to Anchor the Franchise

Leadership across used and new vehicle financing: Vehicle finance remains Shriram Finance's largest and most established business segment. The company continues to enjoy a strong market position in used commercial vehicle financing while steadily increasing its presence in new vehicle lending.

Key growth drivers include:

Existing customers upgrading vehicles.
Expanding financing penetration.
Strong demand for commercial transportation.
Leadership in two-wheeler finance.

Management aims to increase its market share in new vehicle financing while maintaining prudent risk parameters.

Gold Loans and MSME Lending Add Fresh Growth Momentum

Emerging growth engines gaining traction: Beyond vehicle finance, Shriram Finance is witnessing encouraging traction in MSME lending and gold loans. The company continues to adopt a cash-flow-based underwriting model while gradually increasing the proportion of secured lending within the MSME portfolio.

Gold loans are becoming increasingly important because:

Existing customers remain underpenetrated.
Cross-selling opportunities are substantial.
Dedicated gold loan branches are being introduced.
Yield levels remain attractive at approximately 18-20%.

Motilal Oswal expects these businesses to contribute meaningfully to overall growth over the coming years.

Lower Funding Costs Expected to Lift Margins

Structural improvement in liability profile: One of the biggest benefits of the MUFG partnership is expected to be a decline in borrowing costs. Management anticipates nearly 100 basis points reduction in cost of funds over the next two to three years.

Several factors support this outlook:

Potential rating upgrades.
Lower deposit costs.
Improved debt market access.
Liability repricing benefits.

As a result, Motilal Oswal expects Net Interest Margins (NIMs) to improve steadily.

Asset Quality Remains Resilient Despite Temporary Stress

Credit concerns appear manageable: Recent pressure within portions of the MSME portfolio has largely stemmed from temporary cash-flow disruptions linked to tariffs, export weakness, and geopolitical challenges rather than structural deterioration in borrower quality.

Management continues to maintain a conservative provisioning framework while increasing the share of secured lending.

Motilal Oswal forecasts:

Earnings Growth Outlook Remains Strong

Healthy AUM and profit compounding expected: Motilal Oswal projects Shriram Finance to deliver approximately 17% AUM CAGR and 26% profit CAGR between FY26 and FY28.

Projected financial performance remains compelling:

Valuation Appears Attractive Relative to Growth Potential

Compelling risk-reward profile: Despite its improving growth outlook, Shriram Finance continues to trade at reasonable valuation multiples relative to its expected earnings trajectory.

Motilal Oswal's valuation is based on 2.2x FY28 estimated book value per share, resulting in a target price of Rs 1,175.

Investor Levels to Watch

Current Price: Rs 913
Motilal Oswal Target Price: Rs 1,175
Potential Upside: 29%
FY28E Book Value Per Share: Rs 547
Expected FY28 RoA: 3.8%
Expected FY28 RoE: 13.1%
Expected FY26-28 PAT CAGR: 26%

Final Takeaway

Shriram Finance appears to be entering a new phase of growth backed by stronger capitalization, improving funding economics, and expanding lending opportunities. The strategic MUFG partnership enhances not only financial strength but also operational capabilities, creating a platform for accelerated yet disciplined expansion. Combined with resilient rural demand, growing gold loan penetration, stable asset quality, and improving margins, the company remains well positioned to deliver superior earnings growth. Motilal Oswal's BUY recommendation reflects confidence that these structural drivers can unlock meaningful shareholder value over the next several years.