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He advises Shriram Capital, the group’s unincorporated holding company. The proposed reorganization, if approved by a majority of minority shareholders and regulators, would result in a streamlined corporate structure and allow its investors – billionaire Ajay Piramal and TPG Capital – to exit the private entity.
Piramal Enterprises Ltd, which bought TPG’s stake in Shriram’s transportation finance unit in 2013, attempted and failed to merge the Chennai-based group with IDFC Ltd. More than two years ago. The consolidated lending entity will also have Rs 1.5 crore of assets under management, making it among the five largest lenders remaining in the country.
The group, chaired by Patriarch R Thiagarajan, is expected to reach out to the respective boards of directors and shareholders in the next two weeks.
Under the composite scheme being considered, two listed companies, Shriram Transport Finance Co. (STFC) and Shriram City Union Finance Ltd (SCUF). Shiram Capital owns a quarter of STFC, which has a market capitalization of Rs.44,726.94 crore, while it owns 34.6% of SCUF, which has a current market value of Rs.14,314.15 crore.
Shriram Transport is a leading supplier of new and used trucks. Shriram City Union, is a non-bank financing company that provides loans to consumer goods, gold and motorcycles, being a market leader.
Once the merger takes place between the two listed companies, it is likely that Shriram Capital will be reverse merged into the new combined listed entity. Sources within the group, on condition of anonymity because the talks are taking place in a private domain, said the value of Shriram Capital is estimated at Rs 25,000-28,000 crore. Shriram Equity Fund and Shriwell Trust together own 42.9% of Shriram’s unlisted share capital; The Sanlam Group owns a 26% stake, while the Piramal Group owns 20%. TPG Capital owns 9.4% and individuals own the remaining 1.7% as of March 2021, according to Crisil.
Shriram Capital also has the life and general insurance business, 77:23 JV with Sanlam Group in South Africa. As part of the overall group consolidation process, it is expected that the insurance venture will be divested or separated into a separate unlisted company. The reason, according to the sources, is the RBI’s unease about the listed shadow banks owning more than 50% stakes in insurance companies, and it was one of the reasons for canceling Shriram’s merger plan last year. For example, in the past, the regulator has given a conditional nod to the merger between Apollo Munich Health Insurance and HDFC Ergo, provided that parent HDFC Ltd’s stake in the combined company does not exceed 50%.
Shriram’s group denies all these speculations. These are only speculations based on old discussions that have now resurfaced. We will formally communicate with all stakeholders if, at any stage, the group decides to restructure its holding/operations,” Shriram Group spokesperson Ravi Subramanian told ET when inquired about the merger plans.
The cited sources warned that the features of the merger had not yet been voted on and a final decision had not yet been reached. Bloomberg was first to report the impending merger on Monday night.
Analysts feel, according to the final assessment of unlisted Shriram Capital, that the Shriram Group’s stake in the merged entity may fall to 17-18% while others believe it will be in the 24-26% range. This will be critical as it will affect the credit rating and the cost of borrowing, which is a major component of any financial services player. Who will lead the merged entity is another topic that needs clarification. Multiple group links. For example, general insurance is highly dependent on the two lending companies of the group.
“A lot of factors will depend on the holding company’s discount. There are only about 7% of shareholders in the two popular STFC and SCUF listed companies. Minority investors may not be blessed with this merger which may also end up being very taxing.”
Amit Nanavati of Nomura believes that “the burden of fusion obviously remains a constraint on any meaningful expansion of complications, and further reclassification will depend on clarity around fusion.”
The asset quality of Shriram’s lending arms took a heavy toll during the pandemic but have recovered in recent quarters. STFC’s net profit increased 13% year-over-year for the second quarter of fiscal 22 as provisions returned to nearly normal levels after rising sharply in the first quarter of the current fiscal year. The growth in AUM in the used car segment was 13% YoY, similar to the growth in the first quarter of FY22. So far the company has restructured loans of Rs 11, 600 crore or 1% of total AUM under the scheme. Covid-19 solution.
Investors appear to be concerned about the slowdown in economic activity, which could affect the asset quality outlook for the Social Housing Fund. However, we believe its current valuation remains reasonable and the stock has the potential to achieve a higher rate as we expect its return on equity to improve over the 22-23 fiscal year.”
Shriram City Union Finance also reported a 10% YoY (YoY) increase in standalone net profit for the second quarter at Rs 282 crore, as compared to Rs 257 crore in the previous year quarter.
“Events over the past two years have tested the resilience of SCUF, particularly given its reliance on the self-employed sector. The company has responded by slowly pursuing growth and recalibrating collection strategies to navigate the challenging environment,” said Prakhar Agarwal of Edelweiss. SCUF beat estimates for more severe recovery trends. Asset stress, despite the uncertainty, has been well managed, with Phase 3 total now at 6.9%. This coupled with limited restructuring and lower ECLGS exchange lends comfort. Business momentum has also improved significantly.”
Additional reporting by Rajesh Mascarenhas