In the quarter that ended in March, Shriram Finance Ltd. demonstrated a 9.9% year-on-year increase in standalone net profit, reaching Rs 2,139.4 crore, aligning closely with Bloomberg's projections of Rs 2,137.5 crore. Despite this positive outcome, financial analysts have expressed apprehensions regarding the pressures on net interest margins, elevated credit costs, and a notable rise in gross stage-2 loans during the same period. Following the announcement of these results, Macquarie and CLSA decided to elevate their target prices, whereas HSBC opted for a reduction.
The company's net interest margins experienced an impact due to maintaining a higher liquidity buffer, holding six months' worth of liquidity instead of the customary three months on its balance sheet. The management anticipates normalization within the next two quarters. Additionally, there was an increase in credit costs, attributed to a 5.3% loan write-off, which affected profit after tax. This effect was somewhat mitigated by reduced taxation.
A significant factor contributing to the concerns raised by brokerages is the strategy adopted by Shriram Finance concerning liquidity management. By doubling the usual liquidity reserve, the firm aimed at ensuring stability and resilience amidst economic uncertainties. However, this approach has temporarily strained the net interest margins. Management’s forecast indicates that over the next few quarters, they expect a return to more standard levels, alleviating some of the current financial pressures.
Credit cost escalation, driven by the substantial write-off of loans, poses another challenge for the organization. While such measures are necessary to clear non-performing assets from the books, they do create short-term financial burdens. These factors collectively influenced the decision-making processes of brokerage firms when reassessing their target prices post-results release.
Looking ahead, Shriram Finance aims to address these issues strategically. Normalization of liquidity buffers and continued efforts in managing credit risks will be pivotal in restoring profitability metrics closer to pre-pandemic levels. As market reactions stabilize following the recent earnings report, investor confidence hinges on the effectiveness of these corrective actions and the company's ability to navigate through existing challenges successfully.