Shriram Finance growth broadens as MUFG lowers funding costs and supports margins

Investment View and Recent Share-Price Performance

Motilal Oswal Financial Services, in its September 29, 2026 company update on Shriram Finance, reiterates its Buy view. The broker considers the recent share-price pressure to be driven principally by cyclical macro concerns, including higher crude prices, elevated bond yields, geopolitical uncertainty and weaker monsoon trends, rather than a deterioration in Shriram Finance's structural earnings drivers. The stock had corrected by approximately 11-12 per cent in the preceding month.

Diversification Beyond Commercial Vehicles

The central investment thesis is that Shriram Finance is diversifying beyond its traditional commercial-vehicle franchise while achieving a structural reduction in cost of funds. Commercial vehicles remain the core business, but new-vehicle finance, MSME loans and gold loans are becoming material incremental growth engines.

• New-vehicle finance represented approximately 16-17 per cent of disbursements, compared with about 10 per cent earlier. Management targets a 20-25 per cent mix over the medium term and approximately 30 per cent over the longer term.
• Management aims to raise the MSME share of AUM to approximately 20 per cent from 13-14 per cent.
• Gold loans could reach around 5 per cent of AUM over three years.

Market Position and Cross-Selling Opportunity

Shriram Finance retains leading market positions in used commercial vehicles at about 25 per cent, used cars at about 78 per cent, new vehicles at about 5 per cent and two-wheelers at about 10 per cent.

Motilal Oswal sees the used-vehicle customer base as an opportunity for cross-selling and upgrades into new vehicles, MSME and gold loans. The report identifies a sizeable MSME credit gap of around Rs 30 trillion. EV financing is also scaling, with monthly disbursements rising from approximately Rs 50 crore a year earlier to approximately Rs 300 crore currently.

MUFG Partnership and Cost of Funds

The MUFG partnership is a major catalyst in the broker's view. MUFG's approximately 20 per cent strategic stake provides capital headroom that management believes can support growth for around four to five years, reducing the immediate need for a further large primary capital raise.

Management expects borrowing costs to decline by around 100 basis points over the next two to three years through rating upgrades, liability repricing, lower deposit rates and improved debt-market access. Motilal Oswal cautions that elevated bond yields, inflation and potential policy-rate increases could make the near-term pace of cost-of-funds improvement uneven, although it expects the structural direction to remain favourable.

Growth and Financial Forecasts

For FY27, management targets approximately 18 per cent AUM growth, although it expects second-quarter FY27 growth of around 15-16 per cent year on year amid macro uncertainty. Motilal Oswal forecasts AUM CAGR of approximately 18 per cent and PAT CAGR of approximately 29 per cent over FY26-FY28.

Asset Quality

Asset quality remains broadly stable, according to the report. Modest Stage 2 and Stage 3 movement has been attributed mainly to seasonality and temporary cash-flow mismatches. At the time of the report, the company had not seen material asset-quality damage from the West Asia conflict or monsoon challenges.

Motilal Oswal estimates credit costs of approximately 1.8 per cent of average assets in FY27E and FY28E. The broker sees improving secured mix, conservative underwriting, customer retention and product diversification as cushions. Management expects MSME underwriting to normalise as the portfolio shifts towards domestic markets, while it remains confident on gold-loan asset quality.

Valuation and Key Risks

Motilal Oswal values Shriram Finance at 2.2 times FY28E book value per share to derive its Rs 1,220 target price.

The principal risks are:

• Weak monsoons or El Niño affecting rural cash flows.
• Higher fuel prices reducing transporter incomes.
• Higher repo rates or inflation increasing incremental funding costs.