Amid the ongoing volatility in the broader market, the financial stocks have been in focus. Shriram Finance, a non-banking financial company (NBFC) that primarily lends to commercial vehicle owners, small businesses and retail customers is one such example. The share price is down 4% in the last 5 days but over the past 1 year, it has delivered a 57% return.
Global brokerage firm Jefferies sees potential for further upside. It has maintained a ‘Buy’ rating on the stock and set a target price of Rs 1,220. This indicates a potential upside of around 21% from the current market price.
Jefferies on Shriram Finance: Outlook stable
According to the brokerage report, the company’s business outlook remains stable. The brokerage also believes that margins could improve over the next few years as funding costs gradually decline. “Our interaction with management suggests CV demand (including used) stays healthy. Shriram Finance reiterated 18-20% AUM growth guidance for FY27-FY28,” the brokerage added.
Let’s take a look at investment rationale behind it –
Commercial vehicle demand remains supportive
One of the key factors supporting the brokerage’s positive outlook is the continued demand for commercial vehicles.
According to the brokerage report, “Shriram Finance indicated that demand has been good in the last three months, including in CVs; transaction velocity has improved, too, aiding used CV demand.”
Commercial vehicles (CVs) include trucks, buses and other transport vehicles that are widely used in logistics and infrastructure activities. When economic activity improves, demand for such vehicles often rises as businesses expand their transportation capacity.
According to the brokerage report, tax changes and replacement demand may have supported vehicle purchases in recent months. “GST cuts and replacement demand have likely supported CV purchases,” the report said.
However, the brokerage also noted that some demand could have been driven by expectations of price increases, which may lead to temporary buying ahead of the hikes.
Loan growth expected to improve
Another factor behind the Jefferies’ positive view is the expected improvement in loan growth.
According to the brokerage report, “Management reiterated its 18-20% AUM growth guidance in FY27-28e.” This growth is expected to come from higher new vehicle loans and larger loan sizes given to existing customers with good repayment records.
The company is also expanding its branch network to support growth in the Micro, Small and Medium Enterprises (MSME) segment. According to the brokerage report, “Shriram Finance has resumed MSME branch expansion and plans to add 600-800 MSME branches in the next two years.”
In addition to this, the company is also planning to expand its presence in gold loans, which is another growing segment in the retail lending market.
Margins and profitability may improve
The brokerage also believes that the company’s profitability could improve as borrowing costs decline over time.
According to the brokerage report, “Management expects avg Cost of Funds to fall c.80bps by FY28e.”
As borrowing costs fall, lending margins may improve. According to the brokerage report, “spreads to improve by 20-25bps.”
The brokerage also highlighted that asset quality trends remain stable. According to the brokerage report, “Collection trends remain healthy in March quarter so far.”
According to the brokerage report, the company expects to gradually reduce stressed loans over the next few years while maintaining stable credit costs.
Conclusion
Overall, Jefferies believes that steady demand in commercial vehicles, improving loan growth and potential margin expansion could support earnings momentum for the company in the coming years.