Shriram Capital, Shriram City Union to merge with Shriram Transport: Key things to know

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Shriram Transport

Shriram Group is an Indian conglomerate founded in 1974. The group had its beginning in chit funds business and later on entered the lending business through Shriram Transport Finance (Commercial Vehicle Finance), Shriram City Union Finance (Consumer and MSME Finance), and Shriram General Insurance Co. Ltd. (General insurance).

The group has now announced the merger of Shriram Capital Ltd (SCL) and Shriram City Union Finance (SCUF) with Shriram Transport Finance Company (STFC). The new entity will be named Shriram Finance Ltd (SFL), and it will be the largest retail Non-Banking Financial Company (NBFC) in India.

What is going to change post-merger?

  • Post-merger, the group will be able to do business with a simplified corporate structure. The less complex structure is expected to attract fresh investors.
  • It is also expected that a major investor in the group, Ajay Piramal, will reduce his holding. Currently, he holds 20% in SCL and 9.96% in SCUF. Post the merger, he will hold 8.37% in the merged entity.
  • The total Asset Under Management (AUM) of the merged entity will be Rs 1,50,000 crore. The total number of consumers will be 20 million, and the distribution network will be 3500.
  • Post-merger, STFC will issue 1.55 shares for every one share of SCUF and 0.097 shares for every one share of SCL.
  • Shriram Housing Finance will become a subsidiary of Shriram Finance with an 85.02% holding. Shriram Finance will hold 44.56% in Shriram Automall India after the merger.
  • Umesh Revankar, executive vice-chairman and chief executive officer (CEO) of STFC, will be vice-chairman of the merged entity.

How will the merger help the group?

The Shriram Group expects to complete the merger activity in nine months. The boards of the three companies have already approved the merger. Now, the approvals from the shareholders of three companies, Reserve Bank of India, National Housing Bank and National Company Law Tribunal are pending.

As the merged entity is going to become the largest NBFC in India, it will benefit from synergies and how it enhances touchpoints with the existing customers.

They are going to launch a super app called 'Shriram One' which will help customers access all the products on a single platform. The merger will help the group bring together all its lending products - loans for commercial vehicles, two-wheeler loans, gold loans, personal loans, auto loans, and small enterprise finance. Shares of Shriram City surged close to 10.5% following the announcement. On the other hand, those of Shriram Transport fell around 6.5% (Tuesday).

Shriram Transport: Brokerage view

Global brokerage firm CLSA has maintained an “outperform” rating on the stock with the target at Rs 1,600 a share. This implies an upside of about 20% percent from the current level. CLSA noted that there will be no meaningful financial impact on the company from the merger. "The lending business would make the merged company one of the largest retail lenders. Pro-forma merged company numbers indicate 1-4 percent EPS dilution and 3 percent BVPS dilution,” said the company.

On similar lines, JP Morgan has an “overweight” call with the target of Rs 1,550. The research firm estimates that the merger would result in a slight dilution. However, the announcement removes a key overhang with synergy benefits at 10 percent of net income. "Pro-forma BPS dilution is 2 percent for the company based on September 2021 net worth. Technical overhang of PE investors selling out to remain post-merger," JP Morgan said in a note.