Shriram Finance gains as Morgan Stanley sees 28% upside potential

Shares of Shriram Finance Ltd rose on February 20 as global research and broking firm Morgan Stanley sees 28 percent upside potential in the stock.

The broking firm assigned a target price of Rs 1,580 to the stock, representing an upside potential of over 28 percent from Friday’s closing price. Morgan Stanley also upgraded its rating for the stock to ‘overweight’.

At 11.20am, Shriram Finance was trading at Rs 1,244 per share, around 1 percent higher on the National Stock Exchange. The stock had tested an intraday high of Rs 1,258.80 earlier in the day.

The firm’s optimism for the company can be attributed to strong fundamentals and better-than-expected Q3 results. Shriram Transport’s net profit for the October-December period was at Rs 1,776.97 crore, up over three times over the last year. The surge in net profit was due to merger-related fair value adjustment.

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Along with the bottomline, net interest income also rose over 85 percent on-year, while assets under management grew 13.17 percent in the third quarter. Morgan Stanley also sharply raised its earnings forecast for Shriram Finance to price in the better-than-expected quarterly performance.

The stock’s valuation discount to its historical mean and also as against its peers has widened, Morgan Stanley wrote in its report. The stock has corrected over 8 percent in the past six months.

Also, the Morgan Stanley report highlights the supply overhang in the stock which is a result of the three way merger. The merger of Shriram Capital and Shriram City Union Finance with Shriram Transport Finance was approved in November 2022 to create a unified entity called Shriram Finance.

As a consequence, the public shareholding in the stock rose to 20.69 percent at the end of December from 5.47 percent in September end as shareholders in the other two Shriram companies that were merged now hold shares in Shriram Finance.

There is uncertainty among market participants whether these investors will stay or sell out their stakes. On that account, Morgan Stanley expects a sharp rally in the stock once the supply overhang is resolved, but remains uncertain of its timing.

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