Expansion Into Underpenetrated Regions Will Strengthen Position In India's Finance Sector

Key Takeaways

• Consistent growth in disbursement and asset management indicates potential revenue growth driven by strong economic activity and customer demand.
  
• Expansion into underpenetrated regions with key products suggests potential for market share growth, improving revenue and net margins.
  
• Economic challenges, like slowing growth and rising inflation in India, may impact Shriram Finance's revenue, margins, and asset quality, especially in auto financing and rural lending.

Catalysts

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

• Shriram Finance's consistent disbursement growth and increasing asset under management (AUM) suggest potential for future revenue growth, driven by strong economic activity and customer demand.
  
• The company's net interest income has been increasing consistently, which could positively impact future earnings, especially as their diversified liability mix may help maintain or improve their cost of funds.
  
• The recent disinvestment in Shriram Housing Finance Limited aligns with strategic focus, potentially leading to improved net margins if they reinvest proceeds into higher-margin areas.
  
• Maintaining stable asset quality and a positive economic outlook, especially in rural and semi-urban areas, could bolster future profitability and reduce credit costs, aiding in margin improvement.
  
• Expansion into underpenetrated regions with key products like MSME loans and gold loans suggests potential for market share growth, driving both revenue and net margin improvements from the diversified product portfolio.

Shriram Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shriram Finance's revenue will grow by 25.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 45.7% today to 36.4% in 3 years time.
• Analysts expect earnings to reach ₹124.7 billion (and earnings per share of ₹325.56) by about December 2027, 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 17.5x on those 2027 earnings, up from 15.3x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to grow by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.99%, as per the Simply Wall St company report.

Shriram Finance Future Earnings Per Share Growth

Risks

• Economic growth in India is slowing down, with the Q2 FY '25 growth rate decelerating to 6.7%. This slowdown indicates potential challenges in sustaining revenue growth due to lower economic activity.
  
• Rising inflation rates, including a notable increase in food inflation, might lead to higher input costs and operating expenses, thereby compressing net margins.
  
• Slumping vehicle sales, particularly in commercial vehicles (CV) and passenger vehicles, point to reduced demand in key markets, potentially affecting revenue streams reliant on auto financing.
  
• The company has observed increased operating expenses due to higher fees paid for loan sourcing, which could further elevate the cost-to-income ratio if not managed effectively, impacting overall earnings.
  
• Adverse weather conditions, like excess or insufficient rainfall, can drastically affect the agricultural sector, which might lead to delinquencies in rural lending portfolios and affect asset quality and future earnings.

Valuation

• The analysts have a consensus price target of ₹3649.68 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 ₹4280.0, and the most bearish reporting a price target of just ₹2941.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹342.8 billion, earnings will come to ₹124.7 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 16.0%.
• Given the current share price of ₹3247.45, the analyst's price target of ₹3649.68 is 11.0% 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.