Buy this NBFC stock for a Target of Rs 3000. Stock Analysis.

 

Execution getting better; earnings are in line.

Shriram Finance’s (SHFL) 4QFY24 PAT grew 49% YoY to INR19.5b (inline) and PPoP grew 27% YoY to ~INR39.1b (inline). FY24 PAT grew 20% YoY to INR71.9b. YoY numbers may not be comparable because of a few one-off items in 4QFY23. 

4Q NII grew 22% YoY to INR50.9b (inline). Reported NIM rose ~3bp QoQ to ~9%, aided by improvement in product mix and only a 5bp QoQ increase in CoB. Credit costs at INR12.6b (inline) translated into annualized credit costs of 2.3% (3QFY24: 2.4% and 4QFY23: 2.6%). 

 The management shared that it does not expect a further rise in CoB and that higher-yielding products such as PL, 2W, and Gold will continue to grow faster than the CV segment. We model NIMs (on AUM) of 9.1%/9.3% for FY25E/FY26E. 

 More cross-selling opportunities for non-vehicle products from improved distribution should translate into a CAGR of 18%/20% in AUM/PAT over FY24-26E. This will result in RoA/RoE of 3.3%/~17.4% in FY26E. 

 As a merged entity, SHFL is well-positioned to capitalise on the diversified AUM mix, improved liability access, and enhanced cross-selling opportunities. The potential monetisation of its stake in Shriram Housing can further unlock optionality value, improve its capital adequacy, and help it engage constructively with credit rating agencies.

Valuation and View.

 SHFL reported an operationally healthy quarter with healthy AUM growth and broadly stable NIM. It has yet to fully utilize its distribution network for products like MSME and gold loans. As it does this over the next year, AUM growth in MSME, PL and gold loans will remain stronger than that in other segments. 

With an expanded geographical presence and a larger workforce, SHFL can leverage cross-selling opportunities to reach new customers and introduce new products, leading to improved operating metrics and a solid foundation for sustainable growth. 

The current valuation of 1.5x FY26E BVPS is attractive for a 20% PAT CAGR over FY24-26E and RoA/RoE of ~3.3%/17.4% in FY26E. Reiterate BUY with a Target Price of INR2,950 (based on 1.7x FY26E BVPS). 

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