Shriram Finance Limited (SFL) continues to display robust performance, endorsed by a recent BUY call from Axis Direct with a target price of Rs 860 per share. The firm’s fundamentals remain strong with optimistic projections for asset under management (AUM) growth at 16% compounded annually through FY26-28. Profitability is bolstered by improving net interest margins (NIM), controlled credit costs, and stable asset quality. The company’s strategic focus on expanding customer reach and optimizing cost structures underpins its capacity to deliver sustainable growth. Investors should consider the stock's attractive valuation metrics against prevailing market conditions and sectoral headwinds.

Axis Direct's BUY Call and Target Price for Shriram Finance

Axis Direct affirms a BUY recommendation on Shriram Finance with a revised target price of Rs 860, a 15% upside from the current market price of Rs 749 as of October 31, 2025. This target is derived from a valuation multiple of 2.5x on FY27 estimated adjusted book value (ABV), an increase from the prior target of Rs 750. The recommendation is built on strong financial fundamentals, a steady operational outlook, and attractive valuation relative to peers.

Financial Performance and Profitability Metrics

- Shriram Finance reported a Net Interest Income (NII) growth of 10.3% year-over-year, with Rs 6,026 crore in Q2FY26, marginally inline with Axis estimates. - Pre-Provision Operating Profit (PPOP) showed an 11.5% year-on-year rise, aided by controlled operating expenses and improved margins. - Profit After Tax (PAT) surged 11.5% YoY to Rs 2,307 crore, beating estimates by 5.7%. - The Cost-to-Income (C-I) ratio improved slightly to 30.5%, reflecting lean operational efficiency. - Return on Assets (RoA) stands at 3.1%, and Return on Equity (RoE) is projected at 16-17%, indicating robust capital utilization.

Advances and Asset Quality Highlights

- The company’s AUM grew 15.7% YoY to Rs 2.81 lakh crore, with major growth segments including Commercial Vehicles (up 14.2%), Passenger Vehicles (21.5%), MSME (25.8%), and Farm Equipment (38.4%). - Credit costs remain steady at approximately 2.07%, indicative of disciplined risk management. - Gross Non-Performing Assets (GNPA) slightly improved to 4.57% from 4.53%, while Net NPA fell to 2.5%. - Provision Coverage Ratio (PCR) sustained at 45%, showcasing prudent provisioning against potential defaults. - The company exercises caution in sectors susceptible to external shocks, such as Construction Equipment and certain SME sub-segments affected by geopolitical tariff pressures.

Margin Expansion and Cost of Funds

- NIMs have improved by 8 basis points sequentially to 8.2%, supported by better utilization of excess liquidity and a decline in incremental Cost of Funds (CoF) to 8.07% from 8.83%. - Approximately 87% of borrowings are fixed-rate, which cushions against rate hikes, with beneficial repricing expected over 18 months. - Management targets an exit NIM of 8.5% while maintaining margins around 8.25-8.3% for FY26. - Strategies to increase deposit share from 28% to 30% aim to optimize borrowing costs further.

Growth Outlook and Sectoral Dynamics

- SFL anticipates a consistent AUM CAGR of 16% over the medium term, supported by demand resilience in rural markets and expanding vehicle financing segments. - Q3FY26 is expected to witness strong growth momentum in 2-Wheelers and Passenger Vehicles, driven partly by GST rate rationalization. - The company is enhancing branch network activation and investing in expertise for gold loans and MSME segments, aligning with broad financial inclusion goals. - Growth in Construction Equipment has slowed due to reduced infrastructure spending, necessitating strategic focus for sustainable expansion.

Valuation and Investment Recommendation

- Trading currently at 2.2x FY27E ABV, Shriram Finance presents an undervalued opportunity relative to its earnings growth and asset quality stability. - The stock’s trajectory from Rs 750 to Rs 860 aligns with expected margin recovery and steady asset quality maintenance. - Investors with a medium- to long-term horizon are recommended to BUY, capitalizing on potential price appreciation and consistent dividend prospects.

Key Risks and Mitigation

- A deceleration in credit growth remains the principal risk, which could constrain earnings momentum and valuation multiples. - Geopolitical tariff impacts on SME customers and slower infrastructure spending pose sector-specific challenges. - The company’s risk mitigation through disciplined credit underwriting, diversified loan portfolio, and proactive customer engagement is expected to sustain asset quality and control credit costs.

Detailed Financial Projections

Bottomline

Shriram Finance Ltd. exhibits compelling fundamentals fortified by steady growth in key portfolios, margin expansion, and sound asset quality. Backed by Axis Direct’s research, the stock is positioned for appreciation to Rs 860, underpinned by a resilient balance sheet and prudent financial management. While sector-specific risks persist, the company’s strategic initiatives and operational discipline warrant bullish investor sentiment. Investors seeking exposure to the Indian NBFC segment with a solid growth trajectory should consider adding Shriram Finance to their portfolio at current levels.