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giving advice Shriram Capital, the unlisted holding company of the group. The proposed restructuring, if approved by a majority minority shareholders and regulators, would lead to a simplified corporate structure and allow its investors- billionaires. Ajay Piramali And TPG Exiting a capital-privately held entity.
Piramal Enterprises Ltd, which had bought TPG’s stake in Shriram’s transport finance arm in 2013, tried to amalgamate the Chennai-based conglomerate with IDFC Ltd and failed more than two years ago. The merged lending entity will also have assets of Rs 1.5 lakh crore under management, making it one of the top five shadow lenders in the country.
The group, headed by Vice-Chancellor R Thiagarajan, is expected to approach the respective boards and shareholders in the next fortnight.
Merger Framework
The overall plan being considered is the merger of two listed companies, Shriram Transport Finance Company (STFC) and Shriram City Union Finance Limited (SCUF). Shiram Capital holds a quarter of STFC, which has a market capitalization of Rs 44,726.94 crore, while SCUF holds 34.6%, which has a current market capitalization of Rs 14,314.15 crore.
Shriram Transport is a leading financier of new and used trucks. Shriram City Union, a non-bank finance company offering loans for consumer goods, gold and motorcycles, is a market leader.
Once there is a merger between the two listed companies, there is a possibility of reverse merger of Shriram Capital into the newly combined listed entity. Group sources on condition of anonymity said Shriram Capital is being valued at Rs 25,000-28,000 crore as the talks are in private domain. Shriram Ownership Trust and Shrivel Trust together own 42.9% of unlisted Shriram Capital; The Sanlam Group holds 26%, while the Piramal Group holds 20%. According to Crisil, as of March 2021, TPG Capital holds 9.4% and individuals hold the remaining 1.7%.
Shriram Capital also has its own life and general insurance business, a 77:23 joint venture with the Sanlam Group of South Africa. As part of the overall group amalgamation process, the insurance enterprise will be demerged or merged into a separate unlisted company. Explain the sources, this is because of RBI’s woes about listed shadow banks holding more than 50% stake in insurance businesses and this was one of the reasons why the Shriram merger scheme was shelved last year. For example, in the past, the regulator had given a conditional approval for a merger between Apollo Munich Health Insurance and HDFC Ergo, that parent HDFC Ltd’s stake in the merged company should not exceed 50%.
“Shriram Group refutes all such speculations. These are nothing but speculations based on old discussions, which are now coming to the fore again. If the group decides to restructure its holding/operations at any stage, we will formally speak to all the stakeholders.
Sources warned that voting on the merger modalities is yet to take place and no final decision has been taken yet. Bloomberg first reported the impending merger on Monday evening.
challenges ahead
Analysts are of the view that subject to the final valuation of unlisted Shriram Capital, Shriram Group’s stake in the merged entity may fall to 17-18%, while some others expect it to rise to 24 percent. would be in the range of -26%. This will be important as it will affect the credit rating and cost of borrowing, which is a major component for any financial services player. Who will lead the merged entity is another issue that needs clarity. Group relations are many. For example, General Insurance is heavily dependent on the group’s two lending businesses.
“A lot of factors will depend on the exemption of the holding company. The two listed companies STFC and SCUF have only 7% shareholders in common. “Minority investors may not bless this merger, which could also result in higher taxes,” said the head of research at a leading brokerage firm.
Nomura’s Amit Nanavati believes, “The excess of mergers clearly remains an impediment to any meaningful expansion in multiples and further ratings will depend on clarity around the merger,” even The companies have navigated the Covid disruptions well.
The asset quality of Shriram’s lending arms declined sharply during the pandemic, but has improved in recent quarters. STFC’s net profit for the second quarter of FY12 grew by 13% as provisions were back to near normal levels after a sharp rise in the first quarter of the current financial year. Asset under management in the pre-owned vehicle segment grew by 13% year-on-year, similar to Q1 FY22. The company has so far restructured Rs 11,600 crore or 1% of the total AUM under the COVID-19 resolution plan.
“Investors appear to be concerned about a slowdown in economic activity, which may impact the asset quality outlook for SHTF. However, we believe that its current valuation is still reasonable and the stock has potential for revaluation as we expect its ROE to improve in FY22-23,” said Puneet Srivastava, Daiwa Securities.
Shriram City Union Finance also reported a 10% year-on-year (YoY) growth in second quarter standalone net profit at Rs 282 crore as against Rs 257 crore in the year-ago quarter.
“Events of the last two years have tested the resilience of SCUF, especially considering its dependence on the self-employment segment. Edelweiss’s Prakhar Agarwal argued that the company reacted by slowing down on growth and rearranging collection strategies to navigate the difficult environment. “SCUF exceeded estimates of sharp recovery trends. Despite the uncertainties, asset stress was managed well, with gross Phase-3 now at 6.9%. This coupled with limited restructuring and low ECLGS disbursements gives comfort. The pace of business has also picked up significantly.”
Additional reporting by Rajesh Mascarenhas