Shriram Finance gains, brokerages see up to 17% upside after a healthy Q1

Nuvama Institutional Equities has upgraded its rating on Shriram Finance from ‘hold’ to ‘buy’ and raised the target price to Rs 2,145

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Shriram Finance shares opened a percent higher on July 28, a day after the non-bank financier reported a 25.13 percent year-on-year rise in its April-June quarter net profit to Rs 1,675.44 crore.

Investors seemed impressed with the improvement in asset quality. Gross stage 3 assets reduced to 6.03 percent as on June 30 from 6.21 percent in the March quarter and 6.27 percent in a year-ago period.

Similarly, net stage 3 assets stood at 2.96 percent in the first quarter of FY24, lower from 3.19 percent in the previous quarter and 3.32 percent a year ago.

Stage 3 assets in non-banking finance companies (NBFCs) are loans which have been due for more than 90 days.

At 9.20 am, the stock was quoting at Rs 1,831.35 on the National Stock Exchange, up 1.1 percent from the previous close.

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Shriram Finance, which came into being in 2022 following the merger of Shriram Transport Finance Company (STFC) and Shriram City Union Finance, has been rapidly diversifying its loan book.

In the June quarter, its assets under management grew 19 percent from the previous year, driven by growth in passenger vehicles, gold loans, MSME and personal loans. Erstwhile branches of STFC have also started offering personal loans now, thus the segment grew 81 percent year on year.

“As a merged entity, SHFL has strategically positioned itself to capitalise on a diversified AUM mix, improved access to liabilities and enhanced cross-selling opportunities,” analysts at Motilal Oswal Financial Services said in a note, referring to assets under management.

The domestic broking firm has a “buy” call on the stock at a target price of Rs 2,100, a 16 percent upside from the current market price.

With the alignment of salaries in Q1, all merger related costs are now fully captured, analysts said. This is why the NBFC’s cost-to-income ratio was higher during the quarter. The cost-income ratio stood at around 31 percent against 27 percent the year-ago quarter on the back of around 33 percent YoY increase in employee expenses.

Also Read: Shriram Finance Q1 results: Net profit rises 25% YoY to Rs 1,675 crore

Nuvama Institutional Equities has upgraded the stock from “hold” to “buy” and raised the target price to Rs 2,145, a 17 percent upside from the current price.

One of the reasons behind Nuvama’s upgrade is that the management does not expect cost of funds to rise from here. In the June quarter, the NBFC’s cost of fund rose seven basis points sequentially to 8.89 percent.

One basis point is a hundredth of a percentage point.

In the earnings call, the management reiterated its AUM growth guidance of 15 percent for FY24, though there would be more clarity o the full year forecast by the end of the second quarter after evaluating the state of the rural economy and the impact of monsoon.

In June, TPG and Piramal Enterprises sold their entire stake in Shriram Finance which was picked up by several domestic mutual funds. With this, the technical overhang on the stock is now behind us, said analysts.

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