In a recent analysis of Shriram Finance’s quarterly performance, Macquarie has reaffirmed its ‘outperform’ rating for the stock, attributing the company’s profit shortfall to declining Net Interest Margins (NIMs) and rising credit costs. While the brokerage raised its target price in response to the results, HSBC lowered its expectations, reflecting varying outlooks on the company’s financial health.

Financial Performance Insights

Shriram Finance’s financial results reveal a mixed performance, highlighting both strengths and challenges:

• Interest Income: Increased by 19%, reaching Rs 10,790 crore, up from Rs 9,077 crore.
• Interest Expense: Rose 31% to Rs 5,224 crore, compared to Rs 3,988 crore.
• Net Interest Income: Achieved a 9% growth, totaling Rs 5,566 crore against Rs 5,089 crore.
• Operating Profit: Climbed 11% to Rs 4,335 crore, compared to Rs 3,906 crore.
• Provisions: Increased by 24% to Rs 1,563 crore, up from Rs 1,261 crore.
• Profit After Tax: Grew 7%, reaching Rs 2,144 crore, compared to Rs 2,009 crore.

Current Challenges and Management Expectations

The company’s NIMs faced pressure due to a higher liquidity buffer—maintaining six months’ worth of liquidity instead of the typical three. Management anticipates this liquidity situation will stabilize over the next two quarters. Despite the profit pressures, lower taxes helped cushion some of the impacts.

Key Performance Indicators

• Return on Assets: Slightly decreased to 2.87% from 2.88% (QoQ).
• Gross Non-Performing Assets (NPA): Improved to 4.55% from 5.38% (QoQ).
• Net NPA: Remained stable at 2.64%, down from 2.68% (QoQ).
• Capital Adequacy Ratio: Slightly reduced to 20.66% from 21% (QoQ).
• Assets Under Management: Increased by 17%, now at Rs 2.63 lakh crore, up from Rs 2.24 lakh crore.

Analysts’ Target Price Revisions

Macquarie now sets a target price of Rs 800 for Shriram Finance, emphasizing the transitory nature of current credit costs, especially within the passenger vehicle and commercial vehicle sectors. They predict credit costs to normalize around 2.2% by FY 2025.

On the other hand, CLSA raised its target price to Rs 735, citing strong growth, particularly in the commercial vehicle and personal loan sectors, despite some signs of moderation in overall loan growth. They maintain a positive outlook for the next financial years, forecasting a 15% increase in loan growth.

HSBC, while maintaining a ‘buy’ rating, revised its target price downward to Rs 740. They cited unexpected pressures on NIM and credit costs, projecting near-term earnings challenges but still confident in long-term profitability.

Conclusion

As Shriram Finance navigates these financial waters, analysts remain cautiously optimistic, suggesting a focus on liquidity management and asset quality could bolster future performance. Investors will be keeping a close watch on how the company adapts to the evolving market conditions in the upcoming quarters.