Shriram Finance Soars 146% in 3 Years! Can This Top NBFC Lender Outpace Bajaj Finance and Jio Financial?

Shriram Finance has been one of the top performers in the stock market, with its share price climbing by 146% in just three years. One of the key reasons for its success has been the company’s expanded scale and diversified portfolio. As of 9 September, its stock price reached ₹3,315.70 per share, marking a 58% gain this year alone and bringing its total market capitalisation to ₹1.23 trillion.

However, with potential changes in the Reserve Bank of India’s (RBI) policies on the horizon, many investors are asking if Shriram Finance can continue this impressive growth in the future.

Factors Behind Shriram Finance’s Success

In late 2022, Shriram Finance was formed through the merger of Shriram City Union Finance, Shriram Capital, and Shriram Transport Finance. This merger created India’s largest retail-focused non-banking financial company (NBFC), offering a wide range of lending products including loans for commercial vehicles, two-wheelers, small businesses, and personal finance. It also expanded the company’s reach to rural and semi-urban areas.

This merger allowed Shriram Finance to enter high-growth markets across India and benefit from increased efficiency and cost savings. By the end of the 2023-24 fiscal year, its assets under management (AUM) had grown to ₹2.24 trillion, with the company serving 8.4 million customers. The company’s size and scale give it an advantage, allowing it to improve profitability through economies of scale.

Shriram Finance’s growth also came at a time when India’s NBFC sector was undergoing consolidation. Increased regulations and the need for stronger balance sheets led to a number of mergers in the industry, with Shriram Finance emerging as a major beneficiary of this trend. The company saw a 21.10% year-on-year jump in AUM for 2023-24, contributing to its impressive stock rally.

Financial Growth Continues

Shriram Finance’s strong stock performance reflects its solid financial health. The company’s net interest margin (NIM)—which measures the difference between the interest earned on loans and the interest paid on borrowings—rose to 8.84% in the last fiscal year, up by 5.6%. Maintaining a high NIM, despite rising borrowing costs, highlights Shriram Finance’s strong operational efficiency.

In addition, the company’s return on equity (RoE) improved to 15.6% from 14.8% the previous year. RoE is an important measure for long-term investors, as it shows how well a company is using shareholders’ funds to generate profits. Shriram Finance also posted a net profit of ₹7,190 crore in 2023-24, a 20.3% increase, driven by strong financial growth and cost reduction efforts.

Risk Factors to Watch

Despite its success, Shriram Finance faces certain risks that could affect its future performance. One of these is its exposure to sectors that are sensitive to economic cycles, such as commercial vehicle loans and small business financing. These areas could lead to fluctuations in the company’s gross non-performing assets (NPAs), which are bad loans.

Last fiscal year, Shriram Finance’s NPAs stood at 5.5%, slightly down from 6.2% the previous year. While this is an improvement, NPAs will remain a key area to watch as the company continues to grow its loan book, particularly in riskier sectors.

Another challenge is the prolonged period of high-interest rates. Over the past couple of years, interest rates have risen sharply in India and globally. Since early 2022, the RBI has raised its benchmark repo rate from 4% to 6.5%, increasing the cost of borrowing for companies like Shriram Finance. Although many expect interest rates to decrease soon, high rates could pressure the company’s profitability.

Can Shriram Finance Maintain Its Momentum?

Despite these challenges, Shriram Finance has taken steps to ensure it remains financially healthy. The company has maintained a liquidity coverage ratio (LCR) of 195.55%, well above the regulatory requirement, providing a buffer against rising debt costs. Additionally, a potential interest rate cut by the RBI in the near future could reduce Shriram Finance’s borrowing costs, boosting profitability.

Technology has also played an important role in Shriram Finance’s success. Last year, the company launched the Shriram One app, which integrates lead generation, payments, and loan applications into a single platform. It is also using artificial intelligence and data analytics to assess credit risk more accurately and provide customised lending solutions. These digital advancements could help streamline operations and reduce costs.

Valuation and Potential Growth

Despite a roughly 70% rise in its share price over the past year, Shriram Finance’s price-to-earnings (PE) ratio of 16.3 remains below that of its peers, such as Bajaj Finance (30.5) and Bajaj Finserv (35.1). This suggests there may still be room for the stock to grow as investors start to fully recognise Shriram Finance’s improved fundamentals and potential for long-term growth.

Overall, while Shriram Finance faces some near-term risks, its focus on rural lending, financial inclusion, and digital transformation positions it for continued success. Investors should keep an eye on rising debt costs and credit risk, but the company’s strong foundation and potential for growth could help it maintain its upward momentum in the long term.