Axis Securities Ltd. has initiated coverage on Shriram Finance Ltd. with a 'buy' rating, as it sees a 30% potential upside in the non-banking financial company's stock. The brokerage has a target price of Rs 3,825 per share.
The buy recommendation is driven by five factors, the foremost being the "potential to improve market in the used-commercial vehicle segment", Axis Securities said in a note on Friday. Shriram Finance, notably, is accounted among one of the key automobile loan issuers in the country.
The second reason behind the 'buy' tag issued to Shriram Finance is "reduced cyclicity with lower dependence on the CV portfolio", it added.
The "diversification of portfolio" ensuring healthy growth in assets under management, "steady asset quality" with lower mix of unsecured loans, and "potential to deliver healthy return ratios" were listed as the other factors behind the positive coverage.
The company, which is the flagship entity of the Shriram Group, has delivered "strong AUM growth of around 20%", in the two-year period following the merger of Shriram Transport Finance and Shriram City Union Finance, Axis Securities pointed out.
The brokerage expects the AUM to climb at a compounded annual growth rate of 17% between fiscal 2024 and fiscal 2027. In the same period, the net interest income is likely to grow at 17% CAGR and the earnings is expected to rise by 19% CAGR, it added.
The estimates are based on "healthy growth, primarily in the non-vehicle segment", stable net interest margins, gradually declining operating expenses ratio, and "steady to marginally better credit costs".
Shriram Finance's return on assets is expected in the range of 3.2% to 3.3% between fiscal 2025 and fiscal 2027, the note further stated.
Shares of Shriram Finance were trading 2.15% lower at Rs 2,883 apiece on the BSE at 3:09 p.m., compared to a 1.47% decline in the benchmark Sensex.
The stock has risen 39.7% on a year-to-date basis, and by 43.6% over the past 12 months.
Among the 41 analysts tracking the stock, 39 have a 'buy' rating, whereas one each recommend 'hold' and 'sell', according to Bloomberg data. The average of 12-month analysts' price target implies a potential upside of 27.4%.
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