By Prabhudas Lilladher
We evaluated likely impact of a merger between Shriram Transport Finance (SHTF) and Shriram City Union Finance (SCUF) and believe that it will unlock value for shareholders.
Merger of SHTF-SCUF would see holding company – Shriram Capital – getting listed as a full-fledged financial services firm spread across NBFC, housing and insurance arm and pave way for exit of PE players, thus removing overhang on valuations.
Merger will drive synergy benefits given a loan book of Rs 1,326 bn, lower concentration risks, diversified liability profile, increase in Tier-1 capital and can also improve credit ratings. We reiterate positive stance on the used CV financing business of SHTF at 1.4x PABV FY21E and believe SCUF merger can improve financial metrics. Retain ‘Buy’. SHTF-SCUF merger can provide synergies from (1) AUMs: creation of one of the largest asset financing NBFC with combined AUM of Rs 1,326 bn which can grow by 1.4x at 16-18% CAGR over FY20-21E (2) Diversified loan profile with CV business at 53% of AUM, the auto/MSME/ others accounting for 19%, 15% and 13% of the AUM respectively. (3) Network: creation of strong distribution network comprising of >2,300 branches and 53,000 employees, which will support expansion and aid SCUF to leverage upon SHTF’s rich urban-rural mix (50:50) to expand beyond chit fund clientele. (4) Tier-1 capital post-merger will increase by 142bps mitigating the probability of dilution in the near term (5) NIMs: SCUF’s higher yielding book (19% vs SHTF’s 14-16%), steady business traction than that of SHTF (cyclical business) and strong pricing power of both entities can enable NIM expansion of 110-120bps to 8.5-8.8% (current SHTF NIMs: 7.5%) aiding RoA increase by 20-30bps. We assign 1.8x PABV FY21E and have target of Rs 1,568 for SHTF.