Shriram Finance sees strong AUM growth but monsoon stress clouds asset quality

Investment View and Valuation

Motilal Oswal Financial Services described Shriram Finance’s 2QFY27 performance as a mixed quarter. The broker retained its Buy rating and Rs 1,155 target price, despite near-term asset-quality concerns related to weak monsoons and seasonal stress in affected rural geographies.

The target price is based on 2 times September 2028E book value per share. The stock was trading at 1.5 times FY28E price to book value.

2QFY27 Financial Performance

The improvement in pre-provision operating profit was supported by stronger net interest margins and lower operating costs. The cost-to-income ratio declined by about 290 basis points QoQ to 22.9%. Management expects the ratio to remain around 25% and operating expenditure to assets to remain around 2.5% over the medium to long term. Motilal Oswal models a 24% to 25% cost-to-income ratio in FY27 and FY28.

Disbursements and AUM Growth

Disbursements grew 25% YoY to Rs 54,100 crore in 2QFY27. Assets under management reached Rs 3,29,000 crore, growing about 17% YoY and 4.9% QoQ, slightly ahead of Motilal Oswal’s estimate.

Growth was strong in commercial vehicles, passenger vehicles, gold loans and personal loans, while construction equipment, farm equipment and two-wheelers remained relatively weak. Construction-equipment demand is recovering alongside higher government infrastructure spending.

Management said MSME disbursement growth was supported by expansion from its traditional southern and western markets to a pan-India footprint following the merger. It expects MSME lending to grow faster than other segments, although around 28% of the MSME book comprises unsecured loans.

Growth Guidance and Rural Market Conditions

Management reduced FY27 AUM growth guidance to 15%–17% from around 18%, citing weak monsoons and uncertainty linked to the West Asia conflict. It remains cautious in drought-affected Maharashtra, Karnataka and Telangana, where Shriram Finance has a sizeable portfolio.

Management said moisture stress has affected key crops and that weak monsoons are weighing on rural consumption, particularly entry-level two-wheelers and cars. It also highlighted diversification into non-farm and allied activities, wider irrigation coverage and lower rainfall dependence as factors improving rural resilience.

Margins and Funding Costs

Reported net interest margin improved by around 50 basis points QoQ to about 9.52%, aided primarily by utilisation of equity-infusion proceeds from MUFG. Cost of borrowings declined by about 15 basis points QoQ to 8.47%, while yields fell by about 10 basis points QoQ to 16.65%.

Management expects margins to remain near current levels for one or two quarters before moderating to around 9% in the medium term and 8.5% in the long term. Motilal Oswal estimates net interest margin on assets of 9.6% in FY27 and 9.3% in FY28, compared with 8.2% in FY26.

Asset Quality and Credit Costs

Asset quality is the principal near-term risk. Gross Stage 3 and net Stage 3 were broadly stable QoQ at 4.65% and 2.3%, respectively. However, net slippages rose to 2.06% and Stage 2 assets increased to 7.05%. Write-offs were Rs 800 crore.

Credit costs of about Rs 1,880 crore were around 20% above the broker’s estimate. Management expects credit costs to rise temporarily by 30 to 40 basis points for one or two quarters, although it expects FY27 credit costs to remain below about 2.3%.

Earnings Estimates and Return Outlook

Motilal Oswal has adjusted its FY27 and FY28 earnings estimates for higher credit costs, partly offset by higher margins and lower operating expenditure. The broker forecasts AUM and PAT CAGRs of about 18% and 31%, respectively, over FY26 to FY28E.

For FY28, Motilal Oswal forecasts return on assets of about 4.1% and return on equity of 13.7%.