Shares of Shriram Finance were in focus on January 16 after Morgan Stanley raised its revised price target on the stock to Rs 1,325 from Rs 925 and added it to its Top Pick list. In its recent report, the brokerage said the proposed MUFG stake acquisition could lead to sustained improvement in profitability metrics, funding costs and growth over multiple years.
Morgan Stanley said the transaction could drive “meaningful structural gains in profitability, asset growth, market perception and valuation multiples”, with the revised target implying over 35% upside from recent levels.
Why Morgan Stanley raised its target on Shriram Finance
- MUFG deal seen as additive to an already strong business
Morgan Stanley said the proposed MUFG transaction stands apart from similar deals because Shriram Finance does not require a business fix. The brokerage said the company is already well-scaled, has a long operating history, and has delivered strong return metrics over time. However, it noted that the stock has not been valued in line with these fundamentals due to long-standing perception issues. “SHMF is a well-scaled business with a long vintage, that has had a top-quartile ROA-ROE business but was not valued like one due to legacy perception issues,” Morgan Stanley said.
- Funding cost benefits and debt market access at the centre of the thesis
A key part of Morgan Stanley’s positive view is the expected improvement in Shriram Finance‘s access to funding following MUFG’s entry. The brokerage said MUFG’s capital and strategic partnership should lead to tangible gains in the company’s standing in debt markets. This should result in a lower cost of funds over time, which Morgan Stanley said would support both profitability and loan growth. “MUFG’s capital and strategic partnership should create tangible gains in debt market standing for Shriram Finance,” the brokerage said, adding that “lower cost of funds should raise its ROA-ROE structurally and help boost loan growth”.
- Growth and profitability assumptions support higher valuation
In its proforma base case, Morgan Stanley assumed a 100 basis point decline in cost of funds and a 60 basis point improvement in loan spreads through FY27 – FY29. Based on these assumptions, the brokerage forecast assets under management to grow at a compound annual rate of 18% between FY26 and FY31. It also expects return on assets to remain above 4%, supported by free funds benefits, higher loan spreads, and marginally lower credit costs. “We forecast AUM CAGR of 18% for F26–31,” Morgan Stanley said, adding that it expects ROA “to sustain over 4%, helped by free funds benefit and higher loan spread expansion.”
- ROE and earnings growth expected to improve over time
Morgan Stanley acknowledged that near-term numbers, particularly for FY27, could see variability due to approval timelines, capital infusion, and deployment of excess cash. However, it said this does not alter its longer-term view. The brokerage expects return on equity to rise to around 14.5% by FY28 and about 16% by FY31, with the structural ROE profile improving to over 20% from the earlier 16–18% range. “ROA profile was already strong and should improve further,” Morgan Stanley said, adding that “we see a high likelihood of ROE emergence – to us it’s a question of when, not if.” The brokerage also forecasts annual EPS growth of 23% between FY26 to FY28 on a compounded basis and 17.5% between FY28 and FY31.
Conclusion
Morgan Stanley said its decision to raise the revised target price reflects confidence that the proposed MUFG transaction could improve funding access, return ratios, and growth over several years.