Shriram Finance shares: Nifty's newest stock is likely to see 10-15% upside

Shriram Finance Ltd will be replacing UPL in the Nifty's exclusive club and if one goes by Nuvama Institutional Equities, the NBFC stock is likely to see a potential upside of 10-15 per cent. A single-digit correction for UPL is likely by end of March on Nifty exclusion, the brokerage said.

Shriram Finance shares have jumped 15.59 per cent in year-to-date and 93.75 per cent in the last one year. The stock was the key contender to join the Nifty pack. The NBFC has delivered strong earnings for three quarters now, affirming the positive impact of the recent merger and asset under management (AUM) growth of 15 per cent, Nuvama said as it maintained a 'BUY' recommendation on the stock, designating it as a top pick with target of Rs 2,700.

"A potential divestment of its housing finance arm could enhance capital and valuation," Nuvama said.  On Thursday, Shriram Finance shares were up 0.74 per cent at Rs 2,366.50. UPL shares fell 1.17 per cent at Rs 470.20.

Shriram Finance is the flagship company of the Shriram group with assets under management (AUM) of about Rs 2.14 lakh crore. It has pan-India presence with a network of 3,037 branches and employee strength of 73,485 servicing 82 lakh customers. It has vertically integrated business model and offers financing on a number of products which includes passenger commercial vehicles, loans to micro and small and medium enterprises (MSMEs), tractors & farm equipment, gold, personal loans, and working capital loans, etc.

Antique Stock Broking recently met with the Shriram Finance management and among the key takeaways was the management expectation of maintaining net interest margin (NIM) in the range of 8.8-9.1 per cent over the medium term. The management expects cost of funds to have stabilised currently and the cost to income ratio to come around 25 per cent from 27 per cent currently. The NBFC is aiming to maintain a minimum return on asset of 3 per cent.

Philip Capital in a strategy note on February 28 said the  demand for used commercial vehicles (CVs) stays strong with high attachment rates of fleet operators. The pricing of used CVs has firmed up by 15-25 per cent depending on vintage and application. "Hence, we get both value and volume growth for loan growth in Shriram Finance, leading to 25 per cent loan/disbursement growth in FY25/26," it said while suggesting a target of Rs 3,000 on the stock.

Nomura India said it remains selective on NBFCs and suggested a Shriram Finance shares among its top picks with a target of Rs 2,700.

"The increase in delinquencies in unsecured loans is likely to impact some mid-/small-sized NBFCs that have grown rapidly in this segment over the past few years and have significant exposure to unsecured loans. About 25-30 per centof incremental loan growth for NBFCs during FY22-3Q24 came from unsecured loans, and hence rising delinquencies should negatively impact NBFC’s loan growth as well, along with credit cost. Elevated competition in secured segments should also lead to loan growth moderation. Shriram Finance and Five Star (both rated Buy) remain our top picks in the sector," it said on February 26.

Mirae Assets while initiating coverage on the stock earlier this month said Shriram Finance's customer segment offers it pricing power and it has been largely able to pass on higher borrowing costs to its customers with little impact on its margins. It has managed to sustain on a low-cost base focusing on local hiring, Mirae said.

"We expect the company to deliver PAT growth of 21 per cent CAGR over FY23-26E with healthy loan CAGR of 17 per cent leading to improved ROA of 3.4 per cent by FY26E. We initiate with a Buy for a target price of Rs 2,880 (based on SOTP; valuing core SHFL at 1.8 times FY26E)," it said.

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