Analyst Views On The Potential Merger Of Shriram Capital Group Entities

Analysts expect limited benefits from a merger of Shriram Transport Finance Company Ltd. and Shriram City Union Finance Ltd. as they cater to different customers.

The lack of clarity on the restructuring plan could also be an overhang on the stock performance, they said.

Shriram Capital Group, founded by R Thyagarajan, said it is getting close to merging its listed units, a move the Indian company hopes will help the non-bank financier boost its lending and insurance businesses, according to a Bloomberg report.

While the proposed transaction will result in the holding company getting listed, the insurance businesses will remain as subsidiaries under the lending business, it said.

The deal will also help investors such as billionaire Ajay Piramal and private equity firm TPG to exit.

Here’s what brokerages have to say about such a merger:

Kotak Institutional Equities

• While a clear structure is not spelt out, the company may likely merge these with the holding company.
• Clarity on the merger structure, valuations and timelines will likely have some near-term overhang.
• The merger will create a diversified entity with interests in commercial vehicle, two-wheelers and small business loans, and with stakes in niche insurance businesses.
• Shareholders’ approval is crucial for the transaction to go through.
• Shriram City Union Finance offers a promising steady multi-year growth opportunity. Shriram Transport Finance’s growth will be moderate (about 15 percent) due to its large base but may tend to be a bit volatile. Shriram Transport Finance has an efficient expense management structure, while Shriram City Union Finance has relatively higher operating expenses.
• Shriram Transport Finance and Shriram City Union Finance operate independently without any overlapping customers or products. These businesses remain people dependent and hence co-operation from employees is crucial.
• Both companies trade at inexpensive valuations compared to other non-bank lending peers, that is shareholders said the stocks are underpriced.

HSBC

• Potential merger of Shriram Group NBFCs could create India’s largest asset finance company with asset under management of Rs 1.32 lakh crore. Lack of clarity on group’s restructuring plan continues to be an overhang on the stock.
• For the merged entity, commercial vehicle loans would form 53 percent of consolidated AUMs. The return on equity for the merged entity could be 17 percent. A merged entity would be spread across more than 2,300 branches and would have a base of over 53,000 employees.
• No clarity over the eventual structure of the merged entity, given that apart from the lending businesses, Shriram Group is involved in life and general insurance, asset management, chit funds, broking, wealth management and distribution businesses.
• Uncertain if the deal will be accretive to all minority shareholders, given that major investors across various Shriram Group entities (including the parent) include TPG Group, Apax Partners, Piramal Enterprises, Sanlam and Shriram Ownership Trust, with Piramal being the only overlapping investor across most entities.
• Both companies created niche business models targeting different customers and product segments, hence potential synergy benefits could be limited.

JMFinancial

• With 70 percent of AUM from commercial vehicles, any such merger allows Shriram Transport Finance’s shareholders to transition into a diversified NBFC which will reduce cyclicality.
• Surplus capital at Shriram City Union Finance will improve combined tier-I ratio by 180 basis points thus postponing an equity capital raise for Shriram Transport Finance.
• Shriram City Union Finance would be better placed to remain a standalone entity. The merged entity could experience a supply overhang as investors like Piramal and private equity companies could be looking to exit.