Up 146% in 3 years: Can this top NBFC stock keep its momentum going?

Besides the broader market optimism, Shriram Finance’s newfound scale and diversified portfolio appear to have played a key role in driving its impressive stock performance. As of 9 September, the lender’s stock price was ₹3,315.70 per share, making for a year-to-date gain of roughly 58% and extending its market capitalisation to ₹1.23 trillion.

However, as speculations about the Reserve Bank of India’s potential policy changes loom, many investors are wondering whether the Shriram Finance stock can maintain its upward momentum in the years to come.

Let’s quickly look at the main fundamental factors responsible for Shriram Finance’s recent success and which could continue to drive its stock performance in the future.

Shriram Finance's solid performance

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

The merger helped Shriram Finance not only tap into high-growth markets across India but also leverage synergies across its operations, leading to enhanced operational efficiency and cost savings. With its assets under management (AUM) crossing ₹2.24 trillion at the end of fiscal year 2023-24, the company now serves about 8.4 million customers. This size and scale allow it to achieve better economies of scale, leading to improved profitability.

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

Following the merger, Shriram Finance’s operational synergies resulted in a 21.10% year-on-year jump in its AUM in 2023-24 alone. These key factors could be responsible for driving a spectacular rally in the Shriram Finance stock the last few years.

Financial growth continues

Shriram Finance’s performance on the stock market largely mirrors its robust financial health. The company’s revenue and profitability in recent years highlight its ability to consistently deliver strong financial results. It posted a net interest margin of 8.84% in the last fiscal year, up 5.6% from its NIM in the year before. Shriram Finance’s ability to maintain a high NIM despite rising borrowing costs points to its strong operational efficiency and sound risk management practices.

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

The company’s return on equity (RoE) improved to 15.6% in the last fiscal year from 14.8% in the year prior. For long-term investors, this metric is important as it reflects how well a company is using shareholders’ equity to generate profits. Similarly, Shriram Finance’s net profit for 2023-24 stood firm at ₹7,190 crore, up 20.3%. This solid growth in its bottom line, combined with its effective cost-reduction efforts, strengthens its position as one of the top NBFCs in India.

Some risk factors

Although Shriram Finance’s financial growth trends have been impressive, it’s important for investors to keep an eye on the risk factors that might affect its future performance.

The first risk factor to consider is the company’s exposure to sectors that are sensitive to economic cycles, such as commercial vehicle loans and financing for small and medium enterprises, which could lead to fluctuations in its gross non-performing assets (NPAs), or bad loans. 

Last fiscal year, Shriram Finance’s NPAs were at 5.5%. While this was a slight improvement over its 6.2% NPAs in the prior fiscal year, it could be one of the key areas to watch as the company continues to grow its loan book, especially in riskier segments.

The second potential challenge that Shriram Finance could face in the coming years is the prolonged high-interest rate environment. In the last couple of years, interest rates have risen sharply globally, and India is no exception. After holding at 4% for over one-and-a-half years during the global pandemic phase, RBI started to rapidly raise its benchmark repo rate in the first half of the calendar 2022.

In its latest meeting in August, the central bank held its key policy rate steady at 6.5% for the ninth consecutive time. The prolonged high-interest rate environment could be a concern for Shriram Finance as this increases its cost of borrowing, which could ultimately pressure its profitability. Having said that, it’s widely expected that interest rates could actually head lower in the near future.

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Can Shriram Finance keep its momentum going?

Despite these short-term challenges, Shriram Finance’s efforts to maintain sufficient liquidity buffers and follow its well-proven lending practices could help it minimise the impact of rising debt costs. These efforts are reflected in the company’s 2023-24 liquidity coverage ratio of 195.55%, which was well above the regulatory threshold.

In addition, if RBI changes its stance to slash interest rates in the near term, this could provide a tailwind for Shriram Finance in the coming years by reducing its debt costs.

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

Shriram Finance is also leveraging the power of artificial intelligence and data analytics to assess credit risk more accurately and offer customised lending solutions to its customers. This focus on digital transformation could not only help the company streamline operations and improve customer experience but also reduce costs.

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

On the valuation side, Shriram Finance’s price-to-earnings (PE) ratio rose to 16.3 as of 9 September from 10.6 a year earlier, with a roughly 70% surge in the company’s share price. Despite this increase, its PE remains well below that of peers such as 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", highlighting that it was valued at just 9.6 times its pretax earnings for the 12 months ended September 2023.

Since then, the company has been added to the Nifty 50 index, and its share price has seen solid gains. Yet the market appears to be adjusting to Shriram Finance’s post-merger transformation. As Bakshi pointed out, “It still has a long way to go before it catches up with its peers", which apparently leaves room for further upside as investors start to fully recognize Shriram Finance’s improved fundamentals and growth potential.

 

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

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educational purposes only.

Jitendra Parashar has a bachelor’s degree in journalism and an MBA with specializations in finance and international business. With over 11 years of experience in financial markets research and journalism, he specializes in identifying promising long-term ideas and simplifying complex investment ideas for investors.

Disclosure: The writer or his dependents do not hold the stocks discussed in this article.