Post merger between Shriram Transport Finance (SHTF) and Shriram City Union Finance (SCUF), loan book of the merged entity, Shriram Finance rises by 27% and the portfolio is more diversified. We revise our FY23-25 EPS by -4%/4% factoring in the merger. We believe AUM should grow at 15% CAGR over FY23-25e, but with some NIM pressure, Shriram should deliver moderate 13% EPS CAGR and 14% ROE over FY23-25e. Risk of potential stock supply from large non-promoter shareholders stays an overhang near term. Maintain Hold.
More diversified loan mix post merger: The three-way merger of Shriram City Union and Shriram Capital with Shriram Transport has been completed. Share of SHTF’s auto loans falls to 77% post merger.
We expect Shriram Finance’s loans to grow at 15% CAGR over FY24-25e led by 13% growth in SHTF’s portfolio (pre-merger) and 18% growth in SCUF’s portfolio over FY23-25e. We are positive on commercial vehicles (CV)/used CV markets, but SHTF’s large base and high rundown rates will cap growth in its used CV loans.
Stronger growth in SCUF products should support overall loan growth. Growth in SME loans has been muted , but may inch up. Expansions in non-south markets should drive growth in 2W loans. Growth in PL cross-sell loans to two-wheeler (2W) customers (a key growth driver at SCUF) should stay strong.
Also Read: Shriram City shareholders, creditors clear merger with Shriram Transport Finance Company
With largely fixed rate loans and 25% floating rate liabilities, we see some pressure on net interest margins (NIMs). SHTF has raised lending rates on new loans by 25-100bps depending on segments. At SCUF, yields have improved in recent quarters due to product mix changes. NIMs should be higher y-o-y in FY23 on a proforma basis, but it should moderate over FY24-25e.
We expect Shriram Finance to report 13% EPS CAGR over FY23-25e and 14% ROE over FY23-25e. Risk of equity supply from three key shareholders (Piramal Group, TPG and Apax Partners) holding nearly 15% stake in Shriram Finance, if either of them plan to monetise part of their stake, remains an overhang on the stock.