Shriram Finance’s impressive June quarter (Q1FY27) results alone may not be enough to prop up the stock, given its commercial vehicle (CV) financier tag, at least until crude oil prices stabilize.
Shriram is the second largest non-banking financial company (NBFC) after Bajaj Finance in terms of market capitalization, and is viewed as a proxy play on CVs. Nearly 47% of its assets under management (AUM) is from the CV segment.
When crude oil prices climb, rising diesel costs squeeze the profits of commercial vehicle owners, unless freight rates rise to cushion the blow. This typically raises fears about their ability to repay loans, though no signs of stress have emerged so far, going by the June quarter results.
Shriram’s net interest income (NII) surged 33.5% year-on-year to ₹7,706 crore. Management attributed a ₹500 crore boost in interest income to the ₹39,600 crore received from MUFG in April for a 20% equity stake. However, the earnings call made no mention of the potential savings on interest costs following the retirement of roughly ₹18,000 crore in debt.
Nevertheless, even if the benefit of interest free equity funds were to be completely removed from interest income, NII growth would still have been healthy at 25% year-on-year. Similarly, core pre-provisioning operating profit would have grown nearly 33% year-on-year to ₹5,084 crore.
Shriram’s management has maintained its outlook for AUM, net interest margin (NIM) and credit cost (provision for bad debt). It has stuck to its guidance of 18% growth in AUM for FY27. It believes Q2FY27 could be slightly soft at 15%, similar to Q1FY27, with ongoing uncertainties around the West Asia conflict and the monsoon. Management expects a stronger second half to make up for the slower growth in the first six months of FY27.
Growth drivers
What explains the management’s optimism that the AUM growth rate will pick up? Shriram’s decision to finance more new vehicles should boost AUM as the cost difference between new and old is substantial. Also, about 150 new branches will be added in FY27, which is significant, given that the branch network has remained flat at 3,225 for the 12 months leading up to Q1FY27. While more branches and manpower would mean higher costs, management clarified it does not see the cost-income ratio rising materially from 25% for Q1FY27 as productivity at new branches increases.
NIM is expected to stabilize at 8.5% in the long term, even as it rose 93 bps year-on-year to 9.04% in Q1FY27, because Shriram intends to pass on the benefit of lower cost of funds to borrowers.
Shriram's credit cost-to-total assets ratio held steady at 1.66% in Q1FY27—virtually unchanged year-on-year, sequentially, and against the FY26 average—reflecting stable asset quality. Management expects credit costs to remain below 2% for FY27 and over the medium term. This helps address a key perception issue: even a highly diversified lender like Bajaj Finance recorded a 1.9% credit cost in FY26. Shriram’s numbers show that its CV concentration hasn't led to unusually high risk.
Investors who are willing to take the risk of concentrated AUM will find Shriram’s valuation relatively attractive. The stock is valued at 18 times estimated FY27 earnings based on a Bloomberg consensus estimate, versus 26 times for Bajaj Finance, which is generally seen as the benchmark.