Nifty constituent Shriram Finance Ltd is in a bear grip, falling 20 per cent from its September 27 high of Rs 3,652.15 apiece, likely reflecting concerns over a slowdown in commercial vehicles (CVs), any risk of contagion from fallout elsewhere in the financial system (MFIs, personal loans) and the RBI’s action on select NBFCs.
Kotak Institutional Equities felt the stock is better placed than most peers, given moderate (18 per cent) growth expectations, low unsecured exposure and most importantly, high ECL coverage on the balance sheet.
"While we tweak down estimates, we still find the company heading towards 18 per cent retun on equity, unless the macro deteriorates sharply. Reiterate Buy with fair value of Rs 3,650 (down from Rs 3,700)," Kotak said.
Kotak said the recent performance of Shriram Finance was strong on three key counts. It said the NBFC reported 16 per cent disbursement growth, led to 4 per cent QoQ and 20 per cent YoY loan growth. It came out with stable sequential margins and stable credit costs, with an improvement in asset quality parameters across segments.
"Stock correction likely reflects concerns of a slowdown in HCVs and any risk of contagion from the fallout in other parts of financial services, mostly microfinance/PL and/or risk of tougher RBI regulations on NBFCs," it said.
A recovery in rural demand, according to management, is the silver lining that is likely to support the company’s better performance. "We do not rule out a moderate rise in delinquencies in auto finance in the near term, but high ECL coverage may make up for the same," Kotak said.
Kotak said Shriram Finance has a multi-product model, with guidance of 18 per cent loan growth for FY25-26, followed by a 15 per cent loan growth in FY27. It finds a risk to the asset quality, if OEMs cut vehicle prices in pursuit of volumes.
Kotak said stock investors have expressed concerns about any contagion of fallout in other segments of financial services, viz., microfinance loans to common borrowers of NBFCs. Banks may cut funding lines to NBFCs, it noted.
"In the past, management highlighted a low overlap with MFIs (detailed ratios awaited) as the CV transportation or small business customers (ATS of Rs0.4-0.5 milliomn) are generally more affluent," it said.