On Monday, Investec (LON:INVP) has revised its price target for Shriram Finance Ltd (SHFL:IN) to INR650 from the previous INR700, while retaining a Buy rating on the stock. The adjustment comes in the wake of a slight deterioration in asset quality (AQ). Despite this, Shriram Finance reported robust loan growth at 5% quarter-over-quarter with stable loan spreads.
The company's adjusted profit after tax (PAT), excluding gains from the sale of its housing finance company (HFC), stood at Rs20.8 billion, marking a 14.2% year-over-year increase. Growth in assets under management (AUM) was primarily driven by two-wheelers, micro, small and medium enterprises (MSME), and passenger vehicles, with respective increases of 18%, 7%, and 6% quarter-over-quarter.
Shriram Finance's loan yields and spreads remained stable, but net interest margins (NIMs) saw a 20 basis points drop quarter-over-quarter due to higher liquidity on the balance sheet. Gross Stage 3 (GS3) and Gross Stage 2 (GS2) loans saw a slight uptick of 6 and 11 basis points quarter-over-quarter, respectively. Calculated net GS2/3 slippages worsened quarter-over-quarter by 130/50 basis points, and credit costs rose by 6 basis points quarter-over-quarter to 2.13%.
The deterioration in asset quality was marginal across most segments, with only construction equipment (CE), which constitutes 7% of AUM, and MSME, at 14%, experiencing higher increases of 30 basis points and 20 basis points quarter-over-quarter in GS3, respectively. As of June 2024, Shriram Finance is carrying provisions amounting to 6.4% of AUM, which is the highest among its peer group.
Investec expects Shriram Finance to achieve an 18% growth in AUM and a return on assets (RoA) of 3.3% in the fiscal year 2025. The firm also anticipates that the company will trade at 1.5 times its fiscal year 2026 price-to-book value (P/B) with an average return on equity (RoE) and AUM growth of 16% over the fiscal years 2025 to 2027 estimates.
Following marginal changes to estimates, Investec has reiterated its Buy recommendation with a revised price target of INR650.
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