Shriram Finance's Profit Miss Highlights Rising Finance Cost Challenges in India's NBFC Sector

Shriram Finance Limited, one of India’s leading non-banking financial companies (NBFCs), reported its Q4 FY2025 results on April 25, 2025, revealing a 9.9% year-on-year rise in standalone net profit to ₹21.39 billion ($250.5 million). However, this growth fell short of analysts’ expectations of ₹22.24 billion, marking a critical profit miss for the sector player. The miss was driven by a 31% year-on-year surge in financing costs, the highest since the June 2023 quarter, underscoring persistent headwinds in India’s NBFC landscape.

The Profit Miss: A Closer Look

Shriram Finance’s standalone net profit rose to ₹21.39 billion, but the ₹0.85 billion gap between actual and estimated results reflects mounting operational pressures. Key drivers of the shortfall include:
- Elevated Financing Costs: These jumped 31% year-on-year, driven by high borrowing costs and regulatory adjustments. Despite the Reserve Bank of India’s (RBI) February 2025 easing of risk-weighted capital rules for NBFCs, cost pressures persisted.
- Margin Compression: Net Interest Margin (NIM) dipped to 8.25%, down from 9.02% in Q4 FY2024, as rising finance costs outpaced revenue growth.
- Slowing Asset Growth: Assets under management (AUM) grew 17% year-on-year to ₹2.63 trillion but at the slowest pace since March 2023, signaling a lack of momentum in expanding loan portfolios.

The stock closed 6% lower at ₹655.2 on the results announcement, reflecting investor skepticism about the company’s ability to navigate rising costs amid a competitive NBFC sector.

Sector-Wide Challenges and Regulatory Context

Analysts at Elara Capital noted that the NBFC sector faces "elevated credit costs, operating cost pressures, and modest asset growth expansion", with Shriram Finance’s results emblematic of these industry-wide issues. The RBI’s February 2025 policy aimed to boost credit growth by easing capital requirements for NBFCs, but this had yet to translate into tangible relief for players like Shriram.

Key Financial Metrics: A Deeper Dive

Metric	Q4 FY2025	YoY Change	Analyst Estimates
Standalone Net Profit (₹bn)	21.39	+9.9%	22.24
NII (₹bn)	60.51	+13.4%	58.78
NIM (%)	8.25	-7.4%	-
AUM (₹tn)	2.63	+17%	-
Gross NPAs (%)	4.55	↓ from 5.38%	-

Strategic Moves and Management Guidance

Despite the profit miss, Shriram Finance outlined strategic initiatives to drive future growth:
1. Expansion into Payments: The company plans to launch mobile wallets, prepaid cards, and FASTag services, leveraging its 14 million app users and 10 million existing customers.
2. FY2026 Targets: Management aims for 15% YoY loan growth and a ₹3 trillion AUM milestone, supported by rural market resilience and urban infrastructure recovery.
3. Cost Management: CFO Parag Sharma emphasized reducing excess liquidity to improve NIM, targeting an 8.5%-8.6% margin by mid-FY2026.

Risks and Concerns

• Margin Recovery Uncertainty: The NIM decline to 8.25% highlights vulnerability to interest rate fluctuations and competitive pricing.
• Provision Coverage Decline: The provision coverage ratio fell to 43.28%, down from 51.64% in Q3 FY2025, signaling reduced buffers against potential defaults.
• Dividend Sustainability: While the final dividend of ₹3 per share (totaling ₹1.13 billion) was declared, its sustainability depends on margin recovery and cost containment.

Conclusion: A Cautious Outlook with Strategic Potential

Shriram Finance’s Q4 results underscore the fragile profitability of India’s NBFC sector, where rising financing costs and margin pressures outweigh growth in AUM and NII. While strategic moves like entering the payments sector and FY2026 targets offer hope, investors must weigh these against near-term risks:
- The 31% YoY financing cost surge and 8.25% NIM indicate unresolved profitability challenges.
- Slowing asset growth and a declining provision coverage ratio suggest caution in credit quality assumptions.
- Shareholder sentiment remains fragile, with the stock down 6% post-earnings despite dividend support.

For long-term investors, Shriram Finance’s diversified product portfolio and rural focus could position it to capitalize on India’s economic recovery. However, short-term risks—especially margin compression and cost management—make it a speculative play until NIM stabilizes and financing costs moderate.

In a sector where only the agile survive, Shriram Finance’s success in FY2026 will hinge on executing its cost-cutting plans, deploying liquidity efficiently, and capitalizing on new ventures like digital payments. Until then, the profit miss serves as a stark reminder of the NBFC sector’s ongoing battle against rising costs and slowing growth.