Buy Shriram Finance; target of Rs 2100: Motilal Oswal

Motilal Oswal's research report on Shriram Finance

Shriram Finance’s (SHFL) 1QFY24 PAT grew 25% YoY to ~INR16.7b (in line) with annualized credit costs at ~1.9%. NII grew 7% YoY to INR42b. Reported NIM contracted ~25bp QoQ to 8.3% because of a decline in yields and an increase in the cost of borrowings. The Cost-Income ratio stood at ~31% (PY: ~27%) because of a) ~33% YoY increase in employee expenses, which was a result of salary rationalization across the erstwhile SHTF and SCUF employees and b) an impact of ~INR750 due to the impairment of intangibles. SHFL operates in a benign competitive landscape and gives it the pricing power to pass on its higher cost of borrowings to customers on new loans disbursed. We expect a gradual expansion in NIM over the next three quarters and estimate NIM compression of ~40bp in FY24. The NIM compression could be marginally lower than our estimates. This is due to the positive impact on NII, resulting from fair valuation under merger accounting.

Outlook

As a merged entity, SHFL has strategically positioned itself to capitalize on a) a diversified AUM mix; b) improved access to liabilities; and c) enhanced cross-selling opportunities. We reiterate our BUY rating with a TP of INR2,100 (based on 1.4x FY25E BVPS).