Shriram Finance’s rising non-commercial vehicle share is aiding the stock

One, its valuation was relatively cheaper earlier. Two, the change in perception from being a commercial vehicle (CV) financier to an NBFC focused on gradually building a diversified lending book helped.

Notwithstanding the returns in recent months, Shriram Finance’s stock trades at a price-to-book-value multiple of 2x, based on a Bloomberg consensus estimate for FY25. This figure is 5x for Bajaj Finance and Cholamandalam Investment and Finance Co. Ltd.

Despite Shriram Finance’s healthy return on assets (RoA) of 3.1% for Q1FY25, its return on equity (RoE) at 16% indicates low leverage of about 5x. As more assets will be funded using non-equity funds, there is scope for RoE to improve. The difference in the valuation multiple is huge even after factoring in RoA of 4.6% for Bajaj Finance and 3.2% for Cholamandalam in Q1FY25.

Nuances for investors

Even though Shriram Finance may have been viewed as a proxy play on the CV cycle so far, there are nuances that investors should be cognizant of.

Firstly, it is mainly into financing of used CVs, and the activity in this segment could pick up following two years of high growth in new vehicle sales.

Secondly, the vulnerability to any slowdown in the CV market, be it new or used, has declined as its share in the loan book has fallen over the last two years, to 47% in the June quarter (Q1FY25) from 52% in Q1FY23.

The CV segment is still dominant, but the non-CV portfolio’s rapid rise as seen in the Q1FY25 results should help in diversifying the loan book ahead. While the non-CV portfolio expanded by 27% year-on-year, the growth rate in the CV portfolio was almost half of that.

Growth in loan book

The overall loan book surged 21%. Consequently, the management believes there is an upside risk to its earlier guidance of 15% growth in the loan book for FY25. The management, however, did not specify the quantum of upside.

The net interest income growth rate kept pace with the loan book growth at 21%. Loan loss and provisions were up 35% to ₹1,187 crore, but the metric was lower sequentially. Profit after tax increased 18% to ₹1,980 crore.

The trend in asset quality remained satisfactory with gross non-performing assets (GNPAs) falling by 6 basis points sequentially to 5.39% and net NPAs remaining flat. The company plans to further bring down its GNPAs to 5% in FY25 and accordingly expects credit cost to remain at 2% in FY25.

A basis point is one-hundredth of a percentage point.

NIM levels

The management stated that the cost of borrowing is likely to have peaked at 8.8%, which gives the confidence to sustain a net interest margin (NIM) of about 9% ahead. NIM also gets cushioned by the expansion of high-yielding portfolio like micro, small and medium enterprises (MSMEs), personal loans and gold loans that account for about 20% of the total assets under management (AUM).

Also read | Shriram Finance working to convert personal loans to small business loans

With inflation coming down, there is a possibility that interest rates may remain benign in the near future. Low interest rates help NBFCs more than banks as the former don’t have access to low-cost current account savings account (Casa) deposits.

Also, there is no threat of expected credit loss norms for them as is the case with banks. This would mean investor bias tilting towards NBFCs with a superior RoA than that of banks. While macro and micro factors are in favour of Shriram Finance, some key risks include a slowdown in CV financing market and pressure on yield due to stiff competition.