On Monday, JPMorgan (NYSE:JPM) analyst adjusted the price target for Shriram Finance Ltd (SHFL:IN) from INR 700.00 to INR 670.00, while continuing to recommend an Overweight rating on the stock. The revision was prompted by Shriram Finance's third-quarter performance, where the Profit After Tax (PAT) reached Rs 20.8 billion, marking a 14% year-on-year increase but falling short of JPMorgan's estimate by 3%. This shortfall was attributed to higher-than-anticipated operating expenses and provisions.
The company's Net Interest Income (NII) grew by 14% year-on-year, which was slightly outpaced by the Asset Under Management (AUM) growth of 19% year-on-year. An increase in liquidity impacted the Net Interest Margins (NIMs) negatively. Pre-Provision Operating Profit (PPOP) saw an 11% year-on-year rise, with operating expenses growing by 24% year-on-year, significantly contributing to the drag on profits.
Asset quality experienced a minor decline in the third quarter, with an increase in net slippages pushing the gross stage 2+3 book up by 17 basis points. This was observed across most segments, and credit costs were marginally higher by 5 basis points. The management attributed these dynamics to seasonality and anticipates an improvement in the fourth quarter. They also provided a bullish commentary on overall operator profitability, which contrasts with the reports from some other lenders.
Despite these challenges, Shriram Finance maintained healthy return ratios, with a Return on Assets (ROA) on AUM at 3.4% and a Return on Equity (ROE) at 15.5%. Following the sale of their Housing Finance Company (HFC), the company's tier 1 capital levels strengthened to 20.3%.
JPMorgan's analysis suggests that strong AUM and disbursement growth, reassurance regarding capital adequacy, robust return ratios, and improved asset quality could lead to a reversal of the stock's recent underperformance. Over the past three months, Shriram Finance's shares have underperformed, declining by 18% in comparison to the NSE Bank Index and the NIFTY, which both saw a decrease of 5%. The firm maintains Shriram Finance as one of its key Overweight positions in the market.
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