The proposed reorganisation of Shriram Group’s corporate structure is expected to accelerate growth of Shriram Housing Finance with stronger distribution network and lower cost of borrowings as the housing finance company’s credit rating is likely to be upgraded.
As per the proposed Composite Scheme of Arrangement and Amalgamation, involving various Shriram group entities, Shriram Capital (SCL) and Shriram City Union Finance (SCUF) will merge into Shriram Transport Finance Corporation (STFC) and the merged entity will be called Shriram Finance. After the merger, Shriram Housing Finance (SHFL) will become a subsidiary of Shriram Finance.
“We expect that post the merger SHFL’s growth rate will accelerate to over 40% and continue at that level for a few years. The merger opens up the immense distribution strength of the two merged entities for SHFL to ride on,” said Shriram Housing Finance MD & CEO Ravi Subramanian. Currently, SHFL is a subsidiary of Shriram City Union Finance (SCUF).
“Earlier we had in front of us an opportunity to cross-sell housing loans through the 900 branches of Shriram City Union Finance. Now, we will also be able to cross-sell through the 2,600 branches of Shriram Transport. Shriram Housing Finance is already growing at two times the housing finance industry growth and will soon move to the position of top 5 affordable housing finance companies in India by March, 2022,” Subramanian told FE.
Respective boards of directors of STFC, SCUF and SCL approved the merger proposal on December 13. The group will now approach the National Company Law Tribunal (NCLT), various regulatory bodies and shareholders for their approvals. The merger is likely to take 9-10 months for completion.
Shriram Housing Finance, however, does not anticipate any change in the way of working after the merger. It has initiated a cross-sell initiative ‘Griha Poorti’ across the Shriram City branch network, which is showing early success. “Under this programme, we onboard customers who are credit tested by our group companies. This helps us achieve granular business at significantly lower cost of acquisition. We expect the merger to accelerate this initiative,” Subramanian pointed out.
After the announcement of the merger, Shriram Housing Finance’s credit rating has been revised to AA/Positive from Stable by India Ratings. Crisil and CARE have put its rating of ‘AA’ on credit watch with positive implications. Subramanian said this was a very positive development for SHFL, expecting the rating to be upgraded on account of superior credit and financial performance post-merger and the fact that its parent Shriram Finance Limited was rated higher. “As a result our cost of borrowings will come down by around 25 bps. Last month we also got a large sanction from National Housing Bank (NHB). We expect that over a period of time, NHB contribution to our borrowings will go up. Consequently, we expect cost of borrowing for SHFL to soften, thus having a positive impact on margins and thereby profitability,” he said. The incremental cost of borrowing for SHFL is around 7.50% at present.
According to CARE Ratings, the company has a moderately diversified resource profile. Funding from the banks continues to remain high at 74% as on March 31, 2021. NCDs stood at 17% of the borrowings and NHB refinance stood at 8% of the borrowings as on March 31, 2021. Average cost of borrowings has decreased from 9.23% in FY20 to 8.36% in FY21. SHFL witnessed Assets Under Management (AUM) growth of 70% from Rs 2,306 crore as on March 31, 2020 to Rs 3,929 crore as on March 31, 2021. The total disbursements stood at Rs 2,195 crore in FY21 as against Rs 1,127 crore in FY20. AUM stood at Rs 4,255 crore as on September 30, 2021.
As against a planned 178 ‘Griha Poorti’ sales points, the company will be operational at around 220 locations, in addition to the 100 branches by the end of 2021, Subramanian said, adding in addition, 10 new branches will be added by March 2022, as it was converting high potential ‘Griha Poorti’ sales points to standalone branches. “Post the merger, the goal will be to ramp-up our expansion strategy, under ‘Griha Poorti’. We will foray into new geographies with a much wider presence and leverage the Shriram Finance network. Thus enabling us to achieve deeper presence within specific states. By end of 2023, we will undoubtedly be the largest and most dominant affordable housing player in South India. This is a machine which is on a roll,” he added.