Shriram Finance Limited, established in 1979, is the flagship company of the Shriram group with a presence in Consumer Finance, Life Insurance, General Insurance, Housing Finance, Stock Broking and Distribution businesses. The company is one of India’s largest retail asset financing Non-Banking Finance Company with Assets under Management (AUM) above INR2.5tn.

Shriram Finance has grown to become a critical part of the lending ecosystem, catering to the financing needs of customers, offering several products including passenger commercial vehicles, loans to micro, small and medium enterprises, tractors, gold, personal loans and working capital loans.

Segment-wise Commercial Vehicles, Passenger Vehicles, and MSME contributed to the majority of the AUM mix at 45%, 20%, and 14% respectively in 3QFY25. The company has a pan India presence with a network of 3,196 branches and an employee strength of 79,405, servicing over 9.44mn customers.

Recent performance driving share price

In 3QFY25, the total income demonstrated an increase of 19.9% YoY to INR107bn, and NII grew by 14.3% to INR58.2bn. However, the net interest margin contracted by 51 bps to 8.48% during the period under consideration owing to excess liquidity in the cash profile.

The net income (excluding exceptional items) followed a similar performance trajectory, increasing by 14.4% to INR20.8bn. Considering the sale of the company’s stake in the subsidiary, Shriram Housing Finance for a one-time gain of INR14.9bn, the net income surged 96.3% to INR35.7bn.

However, gross stage 3 assets marked a notable increase of 13.13% to INR135.2bn, and consequently, net stage 3 assets rose by 17.34% to INR65.4bn. Overall, the stock surged by over 11% following the release of the quarter results on January 24, 2025, tracking the positive developments in fundamentals.

Favourable macro dynamics aiding growth

The company is encouraged by the increased Government impetus for infrastructure projects. This should aid the demand for CVs which witnessed flattish sales on second-hand transactions in recent years owing to limited supply. M&HCV sales witnessed a small decline of 1.3% YoY to 90,929 units in 3QFY25. However, this is expected to improve in 4QFY25 with the addition of new infra projects which would drive demand for new M&HCVs because of steel and cement movement.

On the other hand, passenger vehicles recorded decent growth of 4.5% YoY to 10.58 lakh units in 3QFY25. The outlook is further boosted by the recent budget proposal of the introduction of significant tax relief by extending the tax exemption limit to INR1.2mn. This is expected to spur economic activities amongst the masses and hand them more discretionary power. On the overall positive backdrop, the company witnessed disbursements rise to INR437.7bn in 3QFY25, from INR377.9bn in 3QFY24.

Decent growth in NII

The company demonstrated robust growth in net interest income over the period FY19-24, clocking a CAGR of 19.5% to reach INR192bn. Additionally, the group’s net interest margin expanded by 47bps YoY to 8.84% in FY24. Consequently, the net income outpaced NII performance and grew at a CAGR of 23.4% to INR73.7 bn in FY24.

A positive bottom-line trajectory aided in the expansion of the cash position of the company, which was also supported by an increase in borrowings across the period. Total debt reached almost 2x to INR1,519bn as of FY24 end from INR777bn as of FY19 end.

Shriram Finance delivered superior performance compared to its peer M&M Financial Services, which witnessed a CAGR of 6% in NII over the last five years to reach INR74.8bn in FY24. Net income was flat, registering a CAGR of 1.1% to INR19.3bn. However, the company’s other peer, Bajaj Finance, reported solid performance during the same time, growing its NII at a CAGR of 24.9% to INR296bn and net income at a CAGR of 29.4% to INR145bn.

The long-term growth trajectory of the company is further substantiated with analysts anticipating a CAGR of over 11% in net income over the period FY25-27 to reach INR115.4bn. Further, analysts are of the view that the company will sustain an average dividend yield of over 2.3% in the next three years.

Price correction adds to attractive valuation

The company is currently trading at a P/B multiple of 1.9x, lower than the global peer average multiple of 3.4x. Shriram Finance’s peer, Bajaj Finance, is trading at a comparatively higher level at 5.6x, whereas M & M Financial Services is trading at similar levels as the company.

Shriram Finance’s stock has delivered returns of over 17% in the last one year. However, the stock has retreated from the high of INR730 made in September 2024 and has corrected by over 27% since then. This presents a compelling opportunity for value-based investors to evaluate the stock at current levels.

Overall, the company seems poised for growth along with an improvement in macro conditions, as well as backed by a strong fundamental base, access to quality borrowing sources, and expanding AUM levels. However, the company’s operations expose it to credit fraud risk, which can impact margins and profitability. Other major risks include legal and regulatory, liquidity, interest rate, cybersecurity, information technology, and strategic and economic risks. To mitigate the given risks, Shriram Finance implements a robust risk management framework across diverse asset classes.