What does the Shriram Transport Finance-Shriram City Union Finance merger mean for stocks?

Shriram Transport Finance Company Ltd (STFC) on Wednesday said it has received approval from its shareholders and creditors to merge with Shriram City Union Finance (SCUF). Chennai-based diversified financial services company Shriram Group announced the merger of Shriram Capital Ltd and Shriram City Union Finance with Shriram Transport Finance in December last year.

“With the approval of Shriram Transport’s shareholders, the STFC-SCUF merger appears on track for completion in October 2022. The merger may have synergistic benefits, but it is uncertain to what extent they can be realized. Despite the cyclical bumps in Second CV, SHTF’s large base should limit its AUM growth. Normalization of borrowing costs should lift earnings for FY23, but EPS growth should moderate thereafter. The risk of a potential supply of capital by shareholders of the combined entity may be too high,” Jefferies said in a note.

The global brokerage expects the integration to go smoothly. HR integration is largely done and technology platforms are aligned. Shriram targets around 10% synergy gains mainly through cross-selling gains and lower funding costs at SCUF (SCUF IN, NC) due to better credit rating.

While there could be some synergistic benefits, Jefferies sees challenges in execution. Branch employees will need to be trained/retrained to cross sell/sign new products. Given the different products, the cross-selling potential of certain products (such as HCV) may be low.

“We are reducing our EPS by 23-25E by 6-8% as we trim our margin forecasts. Maintain Underperform on Shriram Transport Finance with a price target of 990,” it says.

The merged entity will be known as Shriram Finance Ltd and will be the largest non-banking finance company (NBFC) in the country.

“With the shareholder and creditor vote, we are only a few steps away from closing the deal. We are close to the starting line of a new era for Shriram where we are building a fairly diverse loan book, which can withstand the test of economic and credit cycles from a growth and asset quality paradigm,” he said. in a statement STFC Vice President and Managing Director Umesh Revankar.

The views and recommendations given above are those of individual analysts or brokerage firms and not of Mint.

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