Q3FY24 Review: Shriram Finance: In-line results with sustained profitability

29 Jan 2024 , 11:34 AM

SHFL reported in-line results with AUM growth of 21% YoY and 10bps QoQ NIMs expansion offset by rise in credit cost. The company increased PCR by 5-30bps across stage 1/2/3 loans, with changes in PD/LGD assumptions primarily for SCUF products. Analysts of IIFL Capital Services note that 30+ DPD on PL declined 160bps QoQ to 12.9%, even as sequential PL growth slowed to 8% from 12% in Q2FY24. Analysts of IIFL Capital Services expect SHFL to deliver 15% EPS Cagr over FY24-26; led by resilient margins and scale-up of SCUF products, even as they build higher credit costs (240bps on AUM) due to the changing loan book mix. Retain BUY and raise TP to Rs2,650; implying 1.5x 24-month forward P/B for 3.1%/16% ROAs/ROEs (LTA of 1.6x). 

In-line results with margin outperformance offset by higher credit costs: 

SHFL reported in-line results with AUM growth of 6% QoQ (21% YoY), net profit growth of 4% QoQ and steady ROAs of 3.3%. 10bps NIM expansion was offset by 12bps rise in credit costs. SHFL increased PCR across all three stages of loans by 5-30bps QoQ with net slippages inching up 45bps QoQ to 1.7% (ann.) and changes in PD/LGD assumptions. Analysts of IIFL Capital Services note that PCR was raised mainly for SCUF products (2W, MSME, PL), even as 30+ DPD on PL declined 160bps QoQ to 12.9%. They have built credit costs of 240bps (on AUM) vs management guidance of 220bps (on AUM), given the rising mix of unsecured loans. 

SCUF products continue to drive growth: 

Distribution-expansion-led growth of SCUF products (2W, MSME, Gold and PL) that are growing at 30%+ YoY — continues to drive ~21% YoY growth for SHFL. Analysts of IIFL Capital Services expect the company to deliver 16% AUM Cagr over FY24-26, with meaningful headroom for scaling up SCUF products at new locations and pickup in used CV demand. Analysts of IIFL Capital Services also expect SHFL to sustain at the current 8.9% NIMs in FY25, with incremental COF similar to the backbook cost. 

Retain BUY with TP of Rs2,650: 

Analysts of IIFL Capital Services tweak estimates by 1-2% and raise TP to Rs2,650 (from Rs2,450), as they lift their 24-month forward target multiple to 1.5x (vs LTA of 1.6x) for 3.1%/16% ROA/ROE and 15% earnings growth. Retain BUY.