Shriram Finance: 5 reasons why Motilal Oswal sees a 29% upside potential in this NBFC stock

The brokerage has maintained its ‘Buy’ rating and assigned a target price of Rs 1,175 per share. Based on the current market price, the target implies a potential upside of around 29%.

Motilal Oswal, in its report, noted that the company is entering a new phase of growth supported by a stronger capital base, improving funding profile and a diversified lending business. 

Let’s take a look at the key reason why the brokerage house is bullish on this NBFC sector stock and what the rationale behind it is –

MUFG deal changes the growth equation

A major factor behind the brokerage’s positive view is the strategic partnership with Japan-based financial giant Mitsubishi UFJ Financial Group (MUFG).

Motilal Oswal said that MUFG’s acquisition of a nearly 20% stake through a capital infusion of around $4.4 billion is expected to strengthen the company’s balance sheet and provide additional flexibility for future growth.

The brokerage noted that “Shriram Finance’s strategic partnership with MUFG, involving the acquisition of a 20% stake through a capital infusion of $4.4 billion, marks a transformational milestone for the company.”

The report further stated that the stronger capital position could help the company accelerate its loan book expansion. The company’s assets under management growth may improve to around 18-20% over the medium term compared with the historical growth trend of 15-16%.

Rural markets remain the key focus

As per the report, Shriram Finance intends to deepen its presence in rural and semi-urban regions rather than chase rapid expansion in large metropolitan markets.

“The company focuses on deepening its presence in rural and semi-urban markets, particularly across northern, central, and eastern India,” added Motilal Oswal.

Vehicle finance continues to drive business

Vehicle financing remains one of the company’s biggest strengths. The brokerage report noted that Shriram Finance continues to hold a leadership position in used vehicle financing while also expanding opportunities in new vehicle loans.

The report noted, “Vehicle finance remains a core strength for the company, driven by its market leadership in used vehicle financing and increasing opportunities in new vehicle finance.”

Apart from vehicle loans, the company is also expanding its presence in Micro, Small and Medium Enterprises (MSME) lending and gold loans. 

According to Motilal Oswal, gold loans are emerging as an important growth segment due to cross-selling opportunities and branch expansion initiatives.

Lower funding costs could support margins

Another important trigger highlighted by the brokerage is the expected decline in borrowing costs.

According to the report, “The company expects a 1 percentage point reduction in borrowing costs over the next 2-3 years.”

“Management expects NIMs to remain stable at ~8.5-9.0%, aided by lower CoF and a favourable portfolio mix,” added the report.

Asset quality remains under watch

The brokerage house pointed out that the recent stress in the loan book appears linked more to temporary cash flow disruptions than structural problems.

The brokerage observed that the company’s asset quality trends remain broadly stable and that a higher share of secured lending should help reduce risk over time.

The report stated, “Asset quality trends remain stable, with recent stress largely driven by temporary cash flow disruptions rather than structural weaknesses.”

Motilal Oswal expects credit costs to gradually moderate as the secured loan portfolio expands and customer retention improves.

What investors need to watch

According to Motilal Oswal, Shriram Finance is positioned to benefit from a combination of healthy loan growth, improving operating leverage and lower funding costs over the next few years.

The brokerage expects the company to deliver a compound annual growth rate of around 17% in Assets Under Management and about 26% in Profit After Tax between FY26 and FY28.