Healthy outlook may help Shriram Fin investors ride Q1 bumps
New Delhi: Shriram Finance Ltd’s shares are near their 52-week highs of ₹1,868.15 apiece. The non-banking financial company’s June quarter (Q1FY24) results had its share of hits and misses. But perhaps, investors are taking comfort from the upbeat outlook.
In Q1, lower-than-expected provisioning, improving asset quality, healthy disbursements, and robust asset under management (AUM) growth were among positives. On the flip side, net interest margin (NIM) fell 23 basis points sequentially to 8.32% and operating expen-ses remained elevated due to merger-related costs. The AUM growth of 18.6% year-on-year was driven by increased traction in passenger vehicles and MSME segments. The management has retained its 15% AUM growth guidance for FY24, but has indicated it could consider an upward revision after gauging Q2 performance. Thanks to improved collections, asset quality improved despite Q1 being a seasonally weak quarter.
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NIM was impacted by higher cost of funds which rose to 8.89% sequentially, from 8.82%. Also, yield on assets fell sequentially on higher growth from lower yielding assets like new vehicle segment. Management does not expect significant increase in cost of funds. So, it expects NIM to rise to 8.5% by FY24-end aided by shift in AUM mix to higher yielding products.
Meanwhile, in 2023 so far, the stock has rallied 32%. “The Piramal stake sale in Shriram Finance is completed, so with a key overhang out of the way, the stock has seen a run-up lately. Further, company has diversified from mono line business of commercial vehicles (CV) (mainly used CV) to non-vehicle portfolio, which was key hind-rance in rating upgrade,” Bunty Chawla, AVP (BFSI), IDBI Capital Markets & Securities, said.
The company is taking efforts to benefit from potential cross-sell opportunities arising post strategic merger of Shriram entities. Given the scale, large presence and a diversified portfolio post mer-ger, earnings outlook appears decent. “Cost of funds can edge higher in near-term, but loan mix shift could aid NIMs over FY23-26E,” said the Jefferies India report. With stable asset quality, the company should deliver 16% earnings per share CAGR and 15% return on equity over FY24-26E which should lift valuation, the report added.
For now, investors seem to be factoring the brighter picture adequately. Any emerging signs of stress in personal loan portfolio, which has grown relatively faster, is monitorable. Also, exposure to rural-driven used CV space, faces a potential risk of any rural demand slowdown due to erratic monsoon.
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Updated: 31 Jul 2023, 12:37 AM IST
