Shriram Finance Among Jefferies' Top Picks On Steady Growth Outlook, Asset Quality

Jefferies retained a 'buy' rating on Shriram Finance Ltd., implying an upside of 17% for the stock price, according to a note dated Dec. 4, highlighting that the stock stays among their top picks.

They supported their stance owing to a steady growth outlook for the company, along with asset quality which has held up well.

The brokerage has set a price target of Rs 3,670 per share.

Used Commercial Vehicle Purchases Now More Viable

"Feedback from a mid-sized commercial vehicle operator suggests freight rates are soft due to softer demand and vehicle supply," Jefferies stated.

It highlighted an increase in costs due to higher toll rates, which has weighed on truck operator margins.

According to the brokerage this means that the "economics of a new truck purchase is not attractive," and that viability of a used commercial vehicle is better than purchasing new ones.

This could help Shriram Finance, as new sales among commercial vehicles have faced a slowdown over the year, and a pick-up in second hand sales might imply a similar trend in financing services on these sales done by the company.

"Separate feedback from smaller players suggest credit demand for smaller CVs (used) is still decent, but credit supply is tighter vs. earlier as lenders are more cautious in select pockets," Jefferies states.

Loan, AUM Growth To Hold Up

The company has indicated no major impact on credit demand in its key segments so far, Jefferies said.

"Demand in 2W remains good, Used PV stays steady and gold loan growth which had slowed in Q2 should see some improvement," the note said.

Used vehicle prices were up across most segments, according to company data quoted by the brokerage, and should stay supportive.

Jefferies estimates an 18% growth in assets under management by the company, and a compounded annual growth rate of 17% between fiscal 2024-27, while margins remain range-bound.

Asset Quality Holds Up; Healthy Provisions Provide Buffer

While Shriram Finance's peers have seen some increase in stress in vehicle loans due to weaker macro activity, the company's portfolio has held up better across segments in the second quarter, according to Jefferies.

A major part of the company's used CV loans are to its customers/referral by existing customers at 70%, which may have helped in better portfolio performance, the note said.

While some flow-through of stress is possible, a pick up in macro activity, along with seasonal agriculture related cash flows should ease industry stress in the fourth quarter, Jefferies states.

The company also has a healthy provision buffer of 6% of overall loans, which is generally higher than its peers, it said.

Shriram Finance Share Price Today

Shares of the company were trading 1.4% lower on NSE, compared to a 0.54% decline in the benchmark Nifty 50 as on 11:37 a.m. on Thursday.