Shriram Finance - Growth, Asset Quality In Good Shape: Yes Securities

Yes Securities Report

Post-merger entity Shriram Finance Company Ltd. is a multi-product play having synergistic growth spurt at disposal. Its stronger assets under management growth of 4% QoQ/18.6% YoY in Q1 FY24 surprised many. In our view, the growth momentum could likely continue through the year aided by-

1. residual benefits of value growth in used commercial vehicle/passenger vehicle financing (50%/19% of AUM),

2. firm replacement demand for used PVs,

3. phased roll-out of micro, small and medium enterprise loans (10% of AUM) in vehicle financing branches,

4. distribution of gold loans (3% of AUM) taken to substantial number of vehicle financing branches, and

5. sustained momentum in personal loans (4% of AUM).

We expect 14-15% AUM compound annual growth rate and 18-19% earnings CAGR over FY23-25 with average return on asset/return on equity delivery of 3.3%/16%.

For reviewing estimates, we would closely monitor-

1. pricing and volume growth in used CV/PV segment,

2. distribution roll-out of gold loan and MSME Loans in vehicle financing branches and success in cross-sell,

3. emerging signs of stress in personal loan and MSME loan portfolios (Stage-II coverage seems low in these products) and

4. cost of funds.

Even after a strong run-up in the past three-four months, the stock’s valuation is reasonable at 1.4 times price/adjusted book value and 8.5 times price/earning on FY25 estimates. Retain 'Buy' with an upgraded 12 million target price of Rs 2300.

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