Motilal Oswal Financial Services (MOFSL) has reaffirmed its "Buy" recommendation for Shriram Finance (SHFL), increasing the target price to Rs 700, indicating a potential upside of 33% from the current price of Rs 524. Despite a minor deterioration in asset quality, the company's AUM growth of 19% YoY, robust disbursement momentum, and operational resilience have reinforced investor confidence. The report highlights SHFL's diversified loan portfolio, stable NIM, and promising growth prospects, making it a compelling investment opportunity in the non-banking financial company (NBFC) sector.

Q3FY25 Financial Performance: Resilient Despite Challenges

Shriram Finance reported a 14% YoY growth in adjusted PAT to Rs 20.8 billion during the third quarter of FY25. Including a one-time post-tax gain of Rs 14.9 billion from the sale of Shriram Housing Finance, the overall PAT surged to Rs 35.7 billion.

Key Highlights:

Net Interest Income (NII) grew 14% YoY to Rs 55.9 billion, maintaining positive momentum.
The Pre-Provision Operating Profit (PPoP) increased by 11% YoY to Rs 40.8 billion, in line with expectations.
Credit costs remained stable at 2.1%, although asset quality witnessed slight deterioration.
NIM Pressure: The reported Net Interest Margin (NIM) contracted 25 basis points (bp) QoQ to 8.5%, attributed to a negative carry resulting from higher liquidity. Management expects NIM to improve as liquidity levels normalize in the next two quarters.

Asset Quality and Credit Costs

While there was a minor deterioration in asset quality, the company’s Gross Stage 3 (GS3) ratio rose by only 5 basis points QoQ to 5.4%, with Net Stage 3 (NS3) at 2.7%. The Provision Coverage Ratio (PCR) for Stage 3 loans remained steady at 52%.

Asset Quality by Segment:

Asset quality improved in passenger vehicles (PV) and tractors, while minor deterioration was observed in commercial equipment (CE), commercial vehicles (CV), and MSME loans.
Write-offs were recorded at Rs 4.4 billion, translating to 0.8% of trailing twelve-month AUM.
Management Guidance:

Credit costs are expected to remain below 2% in the near term.
The company anticipates seasonal improvement in asset quality during Q4FY25.

AUM Growth Driven by Healthy Disbursements

Shriram Finance's Assets Under Management (AUM) rose 19% YoY to Rs 2.54 trillion. Disbursements also increased 16% YoY to Rs 438 billion.

Segmental Highlights:

Strong growth in two-wheelers (2W) (+18% QoQ), farm equipment (+7% QoQ), and MSME loans (+7% QoQ).
Gold loans, which saw a decline over the past two quarters, are expected to recover with double-digit growth projected for FY26.
Management’s Outlook:
The company aims to achieve an 18% AUM CAGR over FY24-27, supported by continued growth in both core and non-vehicle financing segments.

Operational Efficiency and Cost Control

Shriram Finance demonstrated ongoing efforts to manage operational expenses, although cost-to-income (C/I) ratio rose slightly to 31.4% during Q3FY25.

Factors Influencing Opex:

The increase in expenses was driven by higher disbursement volumes and employee incentives linked to variable performance.
Management plans to reduce the C/I ratio to around 28% over the next fiscal year by streamlining operations and freezing new hiring.
Future Focus:
Improved productivity, enhanced cross-selling opportunities, and optimal resource allocation are expected to contribute to cost moderation.

Funding and Liquidity Position

Shriram Finance maintains a robust liquidity position, with Rs 270 billion on the balance sheet, equivalent to six months of liability repayments.

Key Funding Metrics:

Cost of funds stood at 8.95%, showing a slight improvement from the previous quarter.
Retail deposits comprised 24% of total liabilities, while bank borrowings, offshore funding, and bond issuance collectively accounted for 57%.
Liquidity Management:
Excess liquidity will be moderated over the next two quarters, potentially benefiting NIM performance once the balance returns to a three-month liability coverage.

Technical Analysis and Key Levels

The stock has shown signs of stability following recent corrections. A technical breakout above Rs 540 could indicate bullish momentum in the near term.

Support and Resistance Levels:

Support: Rs 510 and Rs 490
Resistance: Rs 550 and Rs 575
Trading Insight:
Investors may consider accumulating shares at current levels, targeting Rs 700, as recommended by Motilal Oswal.

Valuation and Investment Outlook

Motilal Oswal highlights Shriram Finance’s attractive valuation at 1.3x FY27E book value per share (BVPS) and a P/E ratio of 11.9x FY25E EPS. The company is well-positioned to deliver a 19% PAT CAGR over FY24-27, alongside improving RoA and RoE metrics.

Dividend Yield:
The projected dividend yield stands at 2.0% for FY25, expected to increase to 2.8% by FY27.

Long-Term Drivers:

Diversification of the AUM mix with higher-yielding loans.
Expanding opportunities in used vehicle financing and EV financing.
Strengthened cross-selling capabilities across a growing customer base.