Shriram Finance scales non-VF portfolio as Q1 AUM growth and margins strengthen

Investment View and Valuation

Prabhudas Lilladher retained its BUY rating on Shriram Finance following the company’s July 25, 2026 Q1 FY27 result update. The broker raised its FY27E and FY28E earnings estimates, supported by stronger margins, favourable growth prospects and controlled credit costs, while retaining its target price of Rs 1,250 against a CMP of Rs 1,005. The target is based on an unchanged 2.4 times multiple of March 2028 adjusted book value.

Q1 FY27 Operating Performance

Shriram Finance reported Q1 FY27 disbursements of Rs 499.7 billion, representing year-on-year growth of 19.5 per cent. Assets under management increased 15.3 per cent year-on-year and 3.8 per cent quarter-on-quarter to Rs 3,138.0 billion.

Growth was led by the commercial vehicle, passenger vehicle, farm equipment and gold segments, which grew 19.4 per cent, 21.2 per cent, 20.6 per cent and 45.8 per cent year-on-year, respectively.

Q1 FY27 earnings exceeded Prabhudas Lilladher estimates. Net interest income rose 33.5 per cent year-on-year and 14.1 per cent quarter-on-quarter to Rs 77,057 million, 13.0 per cent above the broker estimate. Pre-provision operating profit increased 45.2 per cent year-on-year to Rs 60,854 million, exceeding the estimate by 21.7 per cent. Profit after tax rose 59.8 per cent year-on-year to Rs 34,446 million, 29.5 per cent above estimate.

Growth Strategy and Outlook

Management reiterated approximately 18 per cent AUM growth guidance for FY27, supported by momentum in new vehicle finance and the scaling of the non-VF portfolio. New vehicle finance contributed approximately 16 per cent of Q1 FY27 disbursements, and management aims to increase this to approximately 25 per cent over the medium term through larger ticket sizes.

Management’s non-VF strategy includes:

• Doubling the gold-loan business to 5 per cent of AUM using a network of more than 2,200 branches.
• Expanding MSME lending beyond southern India towards approximately 20 per cent of AUM.
• Broadening personal loans beyond existing two-wheeler customers.
• Benefiting from a gradual recovery in construction equipment demand.

Management expects Q2 disbursement growth to remain at current levels and AUM growth to stay above 15 per cent despite macroeconomic uncertainty. Prabhudas Lilladher is more conservative and forecasts AUM growth of 17 per cent in FY27E and 18 per cent in FY28E, reflecting geopolitical risks and a delayed monsoon.

Margins and Operating Leverage

Calculated NIM was 10.7 per cent, up 146 basis points year-on-year, as a roughly 50-basis-point quarter-on-quarter increase in yield more than offset a roughly 10-basis-point rise in cost of funds. Reported NIM improved 43 basis points quarter-on-quarter to 9.04 per cent.

Management said incremental borrowings are principally being deployed for business growth rather than liability repayments, supporting margins. It expects improved cost of funds to be offset over the long term by lower yields as the new vehicle-finance book increases, keeping long-term NIM at approximately 8.5 per cent. Prabhudas Lilladher forecasts calculated NIM of 9.9 per cent in FY27E and 9.7 per cent in FY28E.

Management expects operating leverage to keep cost ratios broadly stable despite plans to add 150 branches in FY27 and recruit staff. However, Prabhudas Lilladher expects operating expenses to remain elevated at around 30 per cent in the near term as Shriram Finance invests in franchise expansion.

Asset Quality and Credit Costs

Asset quality deteriorated slightly due to seasonality. Gross Stage 3 and net Stage 3 were 4.64 per cent and 2.33 per cent in Q1 FY27, compared with 4.58 per cent and 2.33 per cent in Q4 FY26. Stage 2 increased to 7.0 per cent from 6.9 per cent, reflecting a 48-basis-point deterioration in construction equipment.

Product-level gross Stage 3 was highest in construction equipment at 7.1 per cent, followed by farm equipment at 5.9 per cent and MSME at 5.2 per cent. Stage 3 provision coverage improved to 51.0 per cent from 50.3 per cent, while provisions stood at approximately 6 per cent of the loan book.

Management reported no significant stress from geopolitical tensions, fuel-price increases or lower vehicle utilisation. However, the delayed monsoon and El Nino effects remain key Q2 monitorables. Prabhudas Lilladher estimates credit cost of 2.0 per cent in FY27E and 1.9 per cent in FY28E, in line with management’s FY27 guidance of 2.0 per cent.