Motilal Oswal has reaffirmed its BUY rating on Shriram Finance (SHFL) with a 12-month target price of Rs 800, signaling 23% upside potential from current levels. The non-banking financial company (NBFC) faces transient headwinds in asset quality and net interest margins (NIMs), but analysts anticipate a robust recovery fueled by economic revival, strategic diversification into high-yield segments, and operational efficiencies. Key catalysts include normalization of surplus liquidity (Rs 310B as of March 2025), expected repo rate cuts, and branch network expansion targeting underserved markets. With an estimated 19% PAT CAGR through FY27 and attractive valuations at 1.6x FY27E P/BV, SHFL emerges as a compelling play on India’s financialization trend.

Strategic Positioning: Beyond Cyclical Vulnerabilities

Diversification shields against CV cycle volatility: SHFL has reduced its commercial vehicle (CV) exposure to 45% of AUM (from 50% in FY22) while scaling up gold loans, MSME financing, and personal loans to 26% of portfolio. This non-auto mix is projected to reach 28% by FY27, creating a Rs 3.57T AUM base growing at 17% CAGR [1]. The conversion of 750 rural centers into full-service branches will deepen penetration in underbanked regions, particularly for gold loans targeting semi-urban households.

Financial Mechanics: Margins Set for Expansion

NIM compression reverses course: Q4FY25 NIMs dipped to 8.2% due to Rs 310B liquidity overhang from ECB issuances, but management guidance suggests normalization to Rs 18-19B within two quarters. Coupled with 30% borrowings repricing at lower rates in FY26, this could drive cumulative 40bp NIM improvement to 8.6% by FY27 [1]. Spreads should widen from 8.4% to 9.2% as yields on non-CV products (14-17%) offset modest CoF declines [1].

Asset Quality: Temporary Turbulence, Structural Resilience

Technical write-offs mask underlying stress: While reported GNPA improved to 4.6% in FY25 (from 6.9% in FY22), this partly reflects Rs 23.5B technical write-offs in Q4. Excluding this, GS3 would have risen 3bp QoQ to 4.9% [1]. However, the personal loan book shows resilience with GNPA declining to 4.2% (from 5.2% in Sep’23), underscoring disciplined underwriting in unsecured segments. Management expects stabilization around 4.4% GS3 by FY27 [1].

Valuation Matrix: Discounted Growth Story

At 12.3x FY26E P/E, SHFL trades at a 49% discount to sector leader Cholamandalam despite comparable RoE profiles (16.4% vs 20.5%). Motilal’s Rs 800 target implies 2x FY27E P/BV – reasonable for a company delivering 17% AUM growth and 19% EPS CAGR [1]. The stock’s 1.9% dividend yield (FY26E) offers downside cushion amid macro uncertainties.

Execution Risks and Mitigants

Monsoon dependency looms: 35% of AUM is agriculture-linked, making FY26 disbursements sensitive to rainfall distribution. However, IMD’s 102% LPA monsoon forecast and government MSP hikes should support rural cash flows [1]. The company’s used vehicle focus (75% of CV portfolio) provides insulation against new vehicle sales cyclicality.

Conclusion: Accumulate on Dips

Shriram Finance presents a rare combination of growth at reasonable valuation (GARP) in India’s crowded NBFC space. While near-term asset quality pressures could create volatility, long-term investors should accumulate shares below Rs 680 for 15%+ IRR. The Rs 800 target implies 19x FY27E EPS – justifiable given operating leverage from branch expansion and 200bp cost-to-income ratio improvement projected through FY27 [1].