Shriram Finance’s Consolidated Profit Rises Amid Margin Pressures: A Mixed Bag for Investors?

Shriram Finance, one of India’s leading non-banking financial companies (NBFCs), reported a 6% year-on-year (YoY) rise in consolidated net profit to ₹2,144 crore for the quarter ended March 2025, capping a fiscal year in which profits surged 29% to ₹9,576 crore. While the results underscore the company’s ability to grow its top line and leverage merger synergies, they also expose vulnerabilities in net interest margins (NIM) and credit costs—pressures that have sent shares tumbling. The question now is whether Shriram can navigate these headwinds to sustain its growth narrative.

Financial Performance: Strengths and Strains

The Q4 numbers reflect a company riding two simultaneous currents: robust disbursements and revenue growth, versus margin contraction and rising credit costs. Consolidated revenue from operations jumped 21% YoY to ₹11,454 crore, driven by a 13% rise in net interest income (NII) to ₹6,051 crore. The loan book expanded to ₹2.45 lakh crore, a 17% increase over the previous year, fueled by disciplined rural and semi-urban lending.

However, the NIM—a key profitability metric—declined 49 basis points (bps) over two quarters to 8.25%, pressured by excess liquidity (₹300 billion) and a 31% YoY rise in financing costs. Management attributes this to regulatory adjustments and competitive pricing in a crowded lending market. Meanwhile, credit costs surged 18% quarter-on-quarter to 2.4% of assets under management (AUM), as gross Stage 3 assets rose to 5.38%, signaling higher stress loan provisioning.

The one-time gain of ₹1,657 crore from selling its stake in Truhome Finance (formerly Shriram Housing Finance) inflated Q4 profits. Excluding this, core profitability likely declined, as evidenced by a 9.5% YoY drop in net profit during the prior quarter (Q3).

Asset Quality and Capital Strength

Asset quality remained stable, with gross NPAs at 4.55% and net NPAs at 2.64%, down from 5.45% and 2.7% a year ago. The capital adequacy ratio stood at a robust 20.66%, well above the regulatory minimum of 15%. This cushion, however, comes at a cost: excess liquidity of ₹31,000 crore is earning minimal returns, further squeezing margins.

Market Reaction and Analyst Views

Investors punished Shriram’s shares, which fell 6% post-results, erasing earlier YTD gains. The dip reflects skepticism over management’s ability to stabilize NIM and credit costs. Nuvama Financial Holdings, however, maintained a "Buy" rating, upgrading the target price to ₹760, citing long-term growth potential from rural lending and merger synergies. The firm’s 15% AUM growth target for FY2026 hinges on improving NIM to 8.5-8.6%, a goal that requires reducing idle liquidity and tightening cost discipline.

Strategic Priorities: Mergers, Digitalization, and Green Finance

Shriram’s merger of Shriram Transport Finance and Shriram City Union Finance into a unified entity—completed in late 2022—has enhanced scale and geographic reach. The company now aims to deepen its rural lending dominance, leveraging digital platforms to reduce costs. Additionally, its green finance subsidiary (Shriram Green Finance) positions it to capitalize on India’s renewable energy boom, though this segment’s contribution to profits remains nascent.

Challenges Ahead

The road to recovery is fraught with risks. Elevated financing costs and excess liquidity are structural issues requiring strategic refinancing. Meanwhile, credit costs could rise further if economic stress in rural sectors—where Shriram’s portfolio is concentrated—intensifies.

Conclusion: A Balance of Hope and Caution

Shriram Finance’s FY2025 results are a mixed bag. On one hand, its consolidated net profit growth and loan book expansion reflect strong execution of merger synergies and rural lending strategies. The capital adequacy ratio and stable asset quality also provide a solid foundation.

Yet, the NIM decline and rising credit costs pose near-term risks. If margins fail to rebound to 8.5-8.6%, the company’s valuation may remain constrained. Investors must weigh the 29% annual profit growth against execution risks.

At current levels (₹700 as of April 2025), Shriram trades at a price-to-book ratio of 1.4x, below its historical average of 1.6x. While the Nuvama target of ₹760 is achievable over the medium term, near-term returns hinge on NIM recovery and credit cost stabilization.

For now, the verdict is cautious optimism. Shriram Finance’s long-term story remains intact, but investors must monitor liquidity management and rural portfolio health closely.

Data sources: Shriram Finance Q4 FY2024-2025 results, Nuvama Financial Holdings reports, and SEBI filings.