Q2FY24 Review: Shriram Finance: Strong on growth and profitability

27 Oct 2023 , 12:04 PM

SHFL beat estimates by 6%, as margins expanded 50bps QoQ on withdrawal of excess liquidity and increasing mix of higher yielding products. With incremental COF 5-10bps lower than backbook, analysts of IIFL Capital Services expect SHFL to sustain the current margins. SHFL’s PL book, where 30+ DPD is 15%, has ATS was ~40-45k, is being given only to SCUF’s existing 2W customers and is being priced accordingly (~25%). This remains a monitorable for us; analysts of IIFL Capital Services derive comfort from the fact that the current PL NPA of 5.2% is in fact, lower than it has been for SCUF (~10%) and that it intends to cap PL at 5% of AUM (4.4% now). Retain BUY. 

Margin led 6% beat on analysts of IIFL Capital Services ests: 

SHFL net profits were 6% ahead of our estimates, led by strong NII growth (9% QoQ, 17% YoY) as margins expanded 50bps QoQ. This was driven by a drawdown of excess liquidity and increasing mix of higher-yielding SCUF products, which also drove strong AUM growth of 4.9% QoQ (+19.7% YoY). Reported gross / net stage 3 declined 24/16bps QoQ, on higher write offs (1.8% ann.) even as net slippages inched up 25bps QoQ. Consequently, ann. credit costs increased 40bps QoQ to 230bps, which are SHFL’s normalised credit costs. 

Resilient margins and growth acceleration…

SHFL margins expanded 30bps QoQ, adj. for liquidity drawdown and higher sell-down income. We expect SHFL to sustain the current margins with incremental COF 5-10bps lower than the backbook. Additionally, distribution expansion for SCUF’s consumer loans (2W, MSME, Gold and PL) is helping SHFL deliver ~20% AUM growth (vs ~10-12% pre-merger). With 2HFY24 expected to be stronger, analysts of IIFL Capital Services expect SHFL to deliver 20% AUM growth for FY24ii and 18% Cagr over FY23-26ii. 

…at undemanding valuations. Retain BUY with TP of Rs2,250: 

Analysts of IIFL Capital Services raise their estimates by 6-8%, as they incorporate Q2FY24 beat and raise their NIM and growth estimates partially offset by 6-15bps higher credit costs (240bps). SHFL is trading at an undemanding valuations of 1.2x FY25 P/B for 3.1% ROAs and 15.5% ROEs. Retain BUY with unchanged TP of Rs2,250, implying 2YF P/B of 1.4x.