Shriram Finance Reports 2% Profit Growth, Faces Margin Pressure and Asset Quality Concerns

Shriram Finance reported a net profit of ₹605.11 crore for the March quarter, showing a modest 2% increase compared to the same period last year. While the company’s profit showed some growth, the market was more focused on two key concerns: a drop in net interest margins (NIMs) and a surprising decline in asset quality. These factors led to a significant 5% drop in Shriram Finance’s stock price on Monday, following the announcement of its Q4 FY25 financial results. The stock is currently trading at ₹627.90, reflecting a 4.17% decrease.

Financial Performance Highlights

• Interest Income: The company’s interest income grew by 19% year-on-year, reaching ₹10,790 crore, up from ₹9,077 crore last year.
• Interest Expense: However, the interest expense surged by 31%, rising to ₹5,224 crore from ₹3,988 crore in the same period last year.
• Net Interest Income: Despite the increase in interest expenses, net interest income showed a modest 9% growth, reaching ₹5,566 crore from ₹5,089 crore.
• Operating Profit: The operating profit rose by 11%, totaling ₹4,335 crore.
• Provisions: Provisions saw a significant increase of 24%, climbing to ₹1,563 crore from ₹1,261 crore, which slightly impacted profitability.
• Profit After Tax (PAT): The company’s PAT for the quarter stood at ₹2,144 crore, reflecting a 7% growth compared to ₹2,009 crore last year.

Decline in Margins and Asset Quality Concerns

• Return on Assets (ROA): ROA decreased slightly to 2.87% from 2.88% in the previous quarter, indicating a minor dip in profitability.
• Net Interest Margin (NIM): The NIM fell to 8.25% from 8.48% quarter-on-quarter, highlighting pressure on profit margins.
• Asset Quality Improvement: On a positive note, the company’s asset quality showed some improvement. The gross non-performing assets (GNPA) decreased to 4.55% from 5.38%, and net NPAs eased slightly to 2.64% from 2.68%.
• Capital Adequacy: The capital adequacy ratio stood at 20.66%, a slight decrease from 21% in the previous quarter.
• Assets Under Management (AUM): AUM grew by 17%, reaching ₹2.63 lakh crore, up from ₹2.24 lakh crore last year.

Challenges in Net Interest Margins (NIMs) and Asset Quality

One of the main concerns for Shriram Finance was the contraction in its NIMs, which shrank by 23 basis points to 7.7%. This was primarily due to excess liquidity in the company’s balance sheet and a shift towards assets that yield lower returns. While the company had built up liquidity to support future loan disbursements, it negatively impacted profitability, disappointing investors who were expecting more consistent earnings growth.

The decline in NIMs, combined with flat growth in net profit, points to the challenge of maintaining growth while managing margins effectively.

Deterioration in Asset Quality

Another issue that affected the stock price was a decline in asset quality. Gross NPAs rose by 30 basis points to 6.77%, and net NPAs also saw an increase. This was partly due to a large write-off during the quarter, which was part of the company’s effort to clean up its portfolio. There is concern that rising NPAs could lead to higher credit costs in the future, further affecting profitability.

Market Outlook

Despite the company’s strategic focus on liquidity management and portfolio cleanup, these measures have resulted in immediate financial pressures. Investors are now more cautious about Shriram Finance’s future earnings due to these operational risks. While management remains hopeful about asset quality recovery, the uncertainty surrounding it may lead to a period of consolidation for the stock.

Conclusion

In conclusion, while Shriram Finance continues to show growth in certain areas, its financial results for Q4 have shifted the market’s attention from profitability to concerns about margin pressures and asset quality. Investors will be closely monitoring the company’s ability to stabilize margins and improve asset quality in the coming quarters.