Expanding Used Vehicle Market And Green Financing Will Create Future Opportunities

Key Takeaways

• Strong rural credit demand and government projects are likely to drive loan and revenue growth in infrastructure and transportation sectors.
  
• Expansion into EV lending and green financing is expected to diversify revenue streams and positively impact future earnings.
  
• Economic slowdown and rising costs threaten Shriram Finance's revenue and profitability, with declining interest margins and vehicle demand compounding pressures on operational efficiency.

Catalysts

A non-banking finance company, primarily engages in the provision of financing services in India.

• The increasing credit demand from the rural market, supported by positive indicators from good monsoons and crop seasons, is expected to boost loan disbursements, impacting future revenue growth.
  
• Government announcements of new projects and implementation of existing projects are anticipated to stimulate the economy and increase demand for financing in infrastructure and transportation, positively affecting loan growth and revenues.
  
• The establishment of an EV lending vertical and focus on green financing could open new growth avenues and diversify revenue streams in the future, impacting earnings positively.
  
• The normalization of excess liquidity over the next two quarters is expected to enhance net interest margins, improving profitability and earnings.
  
• The anticipated growth in the used vehicle market as the supply of used vehicles increases could significantly boost disbursements and AUM (Assets Under Management), leading to potential revenue growth in the coming years.

Shriram Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shriram Finance's revenue will grow by 25.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.7% today to 35.7% in 3 years time.
• Analysts expect earnings to reach ₹122.2 billion (and earnings per share of ₹65.22) by about January 2028, up from ₹79.8 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹98.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2028 earnings, up from 13.0x today. This future PE is lower than the current PE for the IN Consumer Finance industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.01%, as per the Simply Wall St company report.

Shriram Finance Future Earnings Per Share Growth

Risks

• The Indian GDP growth slowed to 5.4% from 6.7% and below market expectations of 6.5%, indicating potential pressure on overall economic growth and thus impacting Shriram Finance's future revenue growth.
  
• There is an indication of increased wholesale prices due to a rising wholesale price index, which could lead to long-term pressure on margins and impact their profitability.
  
• The NIM (Net Interest Margin) has decreased to 8.48% from 8.99% in Q3 FY '24, suggesting potential challenges in maintaining profitability if the margin continues to decrease.
  
• A decline in the demand for new medium and heavy commercial vehicles (M&HCV) was noted, which could impact Shriram Finance's revenue from vehicle financing if the trend continues.
  
• Operational expenses have risen, and the cost-to-income ratio increased from 27.04% to 28.59%, which could squeeze net margins if this trend persists without a corresponding increase in income.

Valuation

• The analysts have a consensus price target of ₹701.83 for Shriram Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹810.0, and the most bearish reporting a price target of just ₹530.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹342.2 billion, earnings will come to ₹122.2 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 16.0%.
  
• Given the current share price of ₹553.45, the analyst's price target of ₹701.83 is 21.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.