Up 146% in 3 years: Will the shares of this leading non-bank finance company maintain their momentum?

Apart from the broader market optimism, Shriram Finance’s newfound scale and diversified portfolio seem to be playing a key role in driving the stock’s impressive performance. As of September 9, the lender’s share price was ₹USD 3,315.70 per share, which represents a year-on-year gain of approximately 58% and an increase in market capitalization to ₹1.23 trillion.

However, amid speculation about potential policy changes by the Reserve Bank of India, many investors are wondering whether Shriram Finance shares will maintain their rising momentum in the coming years.

Let’s take a quick look at the key fundamental factors that are driving Shriram Finance’s recent success and that could continue to impact the stock’s performance in the future.

Shriram Finance delivers solid results

After the merger of Shriram City Union Finance and Shriram Capital with Shriram Transport Finance in late 2022, Shriram Finance, the merged entity, became India’s largest retail-focused NBFC with a diversified loan portfolio that includes commercial vehicle loans, two-wheeler financing, small business loans and personal finance products. The company now has a strong presence in rural and semi-urban areas as well.

The merger helped Shriram Finance not only reach out to high growth markets in India but also leverage synergies across its operations, leading to increased operational efficiencies and cost savings. With assets under management (AUM) exceeding ₹2.24 trillion at the end of fiscal 2023-24, the company currently serves about 8.4 million customers. This size and scale allows it to achieve better economies of scale, leading to improved profitability.

For more detailed analysis, read on Profit Pulse.

Moreover, this merger came at a time when the NBFC sector in India seemed ripe for consolidation. Increased regulatory scrutiny and the need for stronger balance sheets had prompted several mergers across the sector. And Shriram Finance emerged as one of the biggest beneficiaries of this trend.

Post-merger, operational synergies of Shriram Finance have led to AUM growth of 21.10% year-on-year in 2023-24 alone. These key factors could be responsible for the spectacular rally of Shriram Finance stock over the last few years.

Financial growth continues

Shriram Finance’s performance on the stock exchange largely reflects its solid financial health. The company’s revenue and profitability in recent years underscore its ability to consistently deliver strong financial performance. It posted a net interest margin of 8.84% in the last fiscal, up 5.6% from the previous year’s net interest margin. Shriram Finance’s ability to maintain a high net interest margin despite rising borrowing costs is indicative of its strong operational efficiency and sound risk management practices.

(In short, the NIM shows the difference between the interest a company earns on loans and the interest it pays on deposits or loans.)

The company’s Return on Equity (RoE) improved to 15.6% in the last financial year from 14.8% in the previous year. For long-term investors, this metric is important as it reflects how well the company is utilizing shareholders’ equity to generate profits. Similarly, Shriram Finance’s net profit for FY23-24 remained stable ₹7,190 crore, an increase of 20.3%. This solid growth in net profit, coupled with effective cost reduction measures, reinforces the company’s position as one of the leading non-banking finance companies in India.

Some risk factors

While Shriram Finance’s financial growth trends are impressive, investors should be mindful of risk factors that could impact the company’s future performance.

The first risk factor to consider is the company’s exposure to cyclical sectors such as commercial vehicle lending or SME financing, which can lead to fluctuations in non-performing assets (NPAs) or bad loans.

Shriram Finance’s NPA ratio stood at 5.5% last fiscal. While this was a slight improvement from 6.2% NPA in the previous fiscal, this could be one of the key areas to watch as the company continues to grow its loan portfolio, especially in riskier segments.

The second potential challenge that Shriram Finance may face in the coming years is the prolonged high interest rate environment. Interest rates have risen sharply across the world in the last few years and India is no exception. After maintaining 4% for over a year and a half during the global pandemic, the RBI started raising its benchmark repo rate rapidly in the first half of calendar 2022.

The central bank kept the policy rate steady at 6.5% for the ninth consecutive session at its last meeting in August. A prolonged high interest rate environment could be a concern for Shriram Finance as it increases the cost of borrowing, which could ultimately put pressure on profitability. However, it is widely expected that interest rates could actually come down in the near future.

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Will Shriram Finance maintain its momentum?

Despite these short-term challenges, Shriram Finance’s efforts to maintain sufficient liquidity buffers and adopt proven lending practices can help mitigate the impact of rising debt costs. These efforts are reflected in the company’s FY2023-24 liquidity coverage ratio of 195.55%, which was well above the regulatory threshold.

Moreover, if RBI changes its stance and cuts interest rates in the near future, it could be a boon for Shriram Finance in the coming years by reducing borrowing costs.

Shriram Finance’s investments in technology have also played a major role in its recent success. For example, the Shriram One app, which was launched last year, integrates multiple services, including lead generation, payments and loan applications, on a single platform.

Shriram Finance also leverages the power of AI and data analytics to more accurately assess credit risks and offer tailored lending solutions to its customers. Focusing on digital transformation can not only help the company streamline operations and improve customer experiences, but also reduce costs.

Overall, Shriram Finance’s focus on rural lending, financial inclusion and digital transformation provides a solid foundation for long-term growth. While investors may want to keep a close eye on rising debt costs and credit risk trends that could keep the stock volatile in the short term, it has the potential to maintain its upward trajectory in the long term.

On the valuation side, Shriram Finance’s price-to-earnings (PE) ratio rose to 16.3 as of September 9 from 10.6 a year earlier, with a gain of around 70% in the company’s share price. Despite this increase, the PE ratio remains much lower than the likes of Bajaj Finance Ltd (30.5), Bajaj Finserv Ltd (35.1) and Jio Financial Services Ltd (138.1).

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Professor Sanjay Bakshi, in his insightful teaching note on Shriram Finance, called the stock a “bargain”, pointing out that it was worth just 9.6 times pre-tax earnings for the 12 months to September 2023.

Since then, the company has been added to the Nifty 50 index and its share price has seen solid gains. However, the market seems to be adjusting to Shriram Finance’s transformation post-merger. As Bakshi noted, “it still has a long way to go before it catches up with its peers,” which clearly leaves room for further growth as investors start to fully appreciate Shriram Finance’s improved fundamentals and growth potential.

Note: In this article, we relied on data from the company’s regulatory filings and screener.in. Only in cases where data was not available, we used an alternative but widely used and accepted source of information.

The purpose of this article is to provide interesting charts, data points, and thought-provoking opinions only. This is NOT a recommendation. If you wish to consider investing, we strongly recommend that you consult with an advisor. This article is for educational purposes only.

Jitendra Parashar has a BA in Journalism and an MBA with specialization in Finance and International Business. With over 11 years of experience in financial market research and journalism, he specializes in identifying promising long-term ideas and simplifying complex investment ideas for investors.

Disclosure: Neither the author nor his dependents own any shares mentioned in this article.