Shriram Finance Ltd continues to be one of the top picks for Jefferies India Pvt. This is because the lender believes its growth can withstand the potential increase in assets under management.
Jefferies said AUM could grow by 17% in FY24-26 due to strong demand for used private vehicles, MSME expansion and gold loans at old branches.
Non-bank financial companies can also benefit from the potential expansion of the used commercial vehicle pool, which will be available from fiscal year 2026 onwards. The company has the potential to deliver compound annual growth in earnings per share of 17% and return on equity of 16% over FY2024-26. Jeffries said in a March 21 memo.
Citing a reasonable valuation, the brokerage has a 'buy' rating on Shriram Finance and a target price of Rs 2,750 per share, compared to the current market price of Rs 2,313.7 per share on the BSE. This suggests that it could increase by 18%.
Although lenders have not increased lending rates, changes in the loan mix could push yields up by 10-12 basis points compared to 2024-26, when margins are likely to stabilize. Operating expenses may rise slightly in the fourth quarter, Jefferies said, but could ease from the second half of next year as marketing and other expenses are contained.
The brokerage estimates credit costs to be between 2.2% and 2.3% in FY2024-26, with current credit costs reflecting slippage from the restructuring book and likely to fade after this financial year.
The company's stock price for the next fiscal year is 1.6 times its book value, outperforming its auto-related NBFCs. Jeffries said this is in line with the five-year average of 1.6x, despite improving growth and earnings prospects.
