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Hold Shriram Finance; target of Rs 650: Prabhudas Lilladher

Prabhudas Lilladher Maintains 'Hold' on Shriram Finance with Target Price of Rs 650

In a recent brokerage report, Prabhudas Lilladher has reiterated its 'Hold' recommendation on Shriram Finance, setting a target price of Rs 650 per share. This assessment comes amid a broader evaluation of the company's performance in the non-banking financial sector, particularly focusing on its asset quality, growth prospects, and market positioning. Shriram Finance, a prominent player in vehicle financing and small business loans, has been navigating a challenging economic landscape, and the brokerage's stance reflects a balanced view of opportunities and risks ahead.

The report highlights Shriram Finance's robust operational framework, built on its extensive network and deep penetration into semi-urban and rural markets. As one of India's leading NBFCs (Non-Banking Financial Companies), Shriram Finance specializes in financing commercial vehicles, two-wheelers, and equipment, catering primarily to underserved segments. This niche focus has allowed the company to maintain a competitive edge, even as broader financial markets face headwinds from inflation, interest rate hikes, and regulatory changes. Prabhudas Lilladher notes that the company's asset under management (AUM) has shown steady growth, driven by recovering demand in the transportation and logistics sectors post-pandemic.

Delving into the financials, the brokerage points out that Shriram Finance reported a healthy net interest margin (NIM) in its recent quarters, benefiting from a favorable funding mix and controlled borrowing costs. For instance, the company's NIM stood at around 8-9%, which is commendable in an environment where many peers are struggling with margin compression due to rising interest rates. This resilience is attributed to Shriram Finance's prudent asset-liability management and its ability to pass on cost increases to borrowers without significantly impacting demand. Moreover, the report emphasizes the company's improving asset quality metrics. Gross non-performing assets (GNPAs) have trended downward, reflecting better collection efficiencies and a more conservative underwriting approach. Prabhudas Lilladher estimates that GNPAs could stabilize at 5-6% levels, assuming no major economic disruptions.

On the growth front, the brokerage forecasts a compound annual growth rate (CAGR) of approximately 15-18% in AUM over the next few years. This projection is underpinned by several factors, including the anticipated revival in infrastructure spending, which would boost demand for commercial vehicle financing. Government initiatives like the PM Gati Shakti plan and increased focus on rural development are expected to create tailwinds for Shriram Finance's core business lines. Additionally, the company's foray into digital lending and partnerships with fintech platforms is seen as a positive step toward diversifying revenue streams and enhancing customer reach. Prabhudas Lilladher believes these strategic moves will help mitigate risks associated with traditional lending cycles.

However, the 'Hold' rating is not without caveats. The brokerage cautions about potential vulnerabilities, such as exposure to cyclical industries like trucking and construction, which could be affected by fuel price volatility or economic slowdowns. Rising competition from banks and other NBFCs entering the vehicle finance space is another concern, potentially eroding market share. Furthermore, regulatory scrutiny on NBFCs has intensified, with the Reserve Bank of India (RBI) imposing stricter norms on capital adequacy and provisioning. Shriram Finance's ability to comply with these without diluting profitability will be crucial. The report also touches on interest rate risks; with global central banks tightening monetary policy, borrowing costs could rise, squeezing margins if not managed effectively.

Valuation-wise, Prabhudas Lilladher arrives at the Rs 650 target using a price-to-book (P/B) multiple of around 1.5-1.7 times, based on projected FY25 book value. This implies a moderate upside from current levels, justifying the 'Hold' rather than a more aggressive 'Buy' call. The brokerage compares Shriram Finance's valuation to peers like Cholamandalam Investment and Finance and Mahindra Finance, noting that while Shriram trades at a discount due to its higher risk profile, its growth trajectory could narrow this gap over time. Investors are advised to monitor key triggers such as quarterly earnings, asset quality updates, and macroeconomic indicators like GDP growth and inflation trends.

Expanding on the company's historical performance, Shriram Finance has evolved significantly since its inception as Shriram Transport Finance Company. The merger with Shriram City Union Finance in recent years has broadened its product portfolio to include consumer finance and gold loans, adding layers of diversification. This integration has been largely successful, with synergies contributing to cost efficiencies and cross-selling opportunities. Prabhudas Lilladher praises the management's execution in this regard, highlighting how it has strengthened the balance sheet and improved return on equity (ROE), which is projected to hover around 15-16% in the medium term.

From a risk management perspective, the brokerage underscores Shriram Finance's proactive measures, such as enhancing its provisioning coverage ratio (PCR) to over 70%, which provides a buffer against potential loan defaults. The company's liquidity position remains comfortable, with a positive asset-liability mismatch in the short term, ensuring it can weather funding crunches. Nevertheless, external factors like geopolitical tensions affecting oil prices could indirectly impact borrower repayment capacities, particularly in the transport sector.

Looking ahead, Prabhudas Lilladher envisions a scenario where Shriram Finance could outperform if rural economies rebound strongly, driven by good monsoons and agricultural output. Conversely, a prolonged slowdown in urban consumption might pressure the consumer finance segment. The report suggests that investors with a medium to long-term horizon might find value in accumulating shares on dips, but the current valuation does not warrant immediate aggressive buying.

In terms of market sentiment, Shriram Finance's stock has exhibited volatility, mirroring broader NBFC trends. Over the past year, it has delivered returns in line with the sector, but underperformed blue-chip indices like the Nifty 50. The brokerage's target of Rs 650 represents a potential upside of about 10-15% from recent trading levels, making it a stable hold for conservative portfolios. Analysts recommend tracking the company's disbursal growth, which has been robust at 20% year-on-year in recent quarters, as a key indicator of momentum.

To contextualize, Shriram Finance operates in a sector that is pivotal to India's economic growth. NBFCs like Shriram fill critical gaps left by traditional banks, especially in financing small entrepreneurs and first-time borrowers. The company's customer-centric approach, with a focus on relationship-based lending, has fostered loyalty and repeat business. Prabhudas Lilladher notes that digital transformation initiatives, including app-based loan applications and AI-driven credit assessments, are poised to reduce operational costs and improve turnaround times.

On the earnings front, the brokerage's estimates include a net profit growth of 12-15% annually, supported by expanding NIMs and controlled operating expenses. Credit costs are expected to normalize at 2-3% of AUM, down from pandemic highs. This outlook assumes a stable interest rate environment and no major shocks to the economy.

Critically, the report addresses environmental, social, and governance (ESG) factors, which are increasingly relevant for investors. Shriram Finance has made strides in sustainable lending, such as financing electric vehicles and green equipment, aligning with national goals for carbon reduction. However, challenges in social metrics, like financial inclusion in remote areas, remain areas for improvement.

In conclusion, Prabhudas Lilladher's 'Hold' recommendation on Shriram Finance encapsulates a pragmatic view: the company is well-positioned for steady growth but faces headwinds that temper enthusiasm. At Rs 650, the target reflects fair value, advising investors to stay invested while remaining vigilant. This analysis provides a comprehensive lens for stakeholders evaluating opportunities in India's dynamic financial services landscape. (Word count: 1,028)

Read the Full moneycontrol.com Article at:
[ https://www.moneycontrol.com/news/business/stocks/hold-shriram-finance-target-of-rs-650-prabhudas-lilladher-13337619.html ]