Shriram Finance earnings beat on NIM expansion as MSME and gold loans accelerate

Investment View and Recommendation

Motilal Oswal Financial Services retains its Buy recommendation on Shriram Finance following a 1QFY27 earnings beat driven by net interest margin expansion and stable credit costs. The broker considers Shriram Finance one of its preferred NBFC picks, supported by resilient vehicle-finance demand and a rising contribution from the faster-growing MSME, personal-loan and gold-loan portfolios.

The broker has set a target price of Rs 1,235, based on 2.2 times FY28E book value per share. The stock was trading at 2 times FY27E price-to-book value at the time of the report.

1QFY27 Financial Performance

Shriram Finance reported 1QFY27 profit after tax of Rs 34.4 billion, up about 60 per cent year on year and around 5 per cent above Motilal Oswal's estimate. Net interest income rose about 33 per cent year on year to Rs 77.1 billion, around 7 per cent ahead of the estimate.

The cost-to-income ratio was broadly stable sequentially at about 25.9 per cent, compared with 26 per cent in the previous quarter and 31.7 per cent a year earlier.

AUM Growth and Portfolio Mix

Disbursements grew 20 per cent year on year to Rs 500 billion in 1QFY27. Assets under management stood at Rs 3.14 trillion, up about 15 per cent year on year and 3.8 per cent sequentially, in line with the broker's expectation.

Growth was strong in commercial vehicles, passenger vehicles, gold loans and personal loans. Construction equipment, farm equipment, MSME and two-wheeler growth was comparatively weak. Management maintained its approximately 18 per cent FY27 AUM-growth guidance and plans to reassess it after 2QFY27, when visibility on monsoon trends and rural demand improves.

Management expects commercial-vehicle growth of about 15 per cent, with MSME and gold loans growing faster. It aims to increase MSME's AUM mix to about 20 per cent from approximately 13-14 per cent and gold loans' mix to about 5 per cent from around 2.5 per cent. Around 2,200 branches are enabled for gold loans, providing expansion headroom.

Margin Expansion and Funding Costs

Reported net interest margin improved about 45 basis points sequentially to approximately 9.04 per cent, primarily due to the deployment of proceeds from MUFG's equity infusion. Calculated loan yields rose about 50 basis points sequentially to 16.75 per cent, while the cost of borrowings increased about 10 basis points to 8.6 per cent. This resulted in a spread of about 8.15 per cent.

Management expects new-vehicle financing to increase from roughly 16-17 per cent of current disbursements to 20-25 per cent and eventually 30 per cent. It expects to maintain a broadly stable NIM through a lower cost of borrowings.

Asset Quality and Credit Costs

Asset quality saw minor seasonal deterioration. Gross Stage 3 increased about 5 basis points sequentially to 4.65 per cent, while net Stage 3 was stable at 2.3 per cent. Net slippages rose to 1.95 per cent and Stage 2 assets increased about 5 basis points to 6.95 per cent. Provision coverage on Stage 3 improved about 55 basis points sequentially to approximately 51 per cent.

Management said higher fuel prices related to West Asia tensions have largely been passed on by vehicle operators. Operating margins remain stable, vehicle demand is healthy and there are no meaningful vehicle-idling or stress indicators. Management reiterated its medium-term credit-cost guidance of below 2 per cent, while Motilal Oswal models credit costs of 2.1 per cent in both FY27E and FY28E, compared with 2 per cent in FY26.

Estimates, Returns and Valuation

Motilal Oswal raised FY27E EPS by 7 per cent to reflect higher NIM after the MUFG infusion and marginally lower credit costs. The broker forecasts AUM and profit-after-tax CAGRs of about 18 per cent and 29 per cent, respectively, over FY26-FY28E.