What does the merger of Shriram Transport Finance and Shriram City Union Finance mean for the stock?

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

“With Shriram Transport shareholder approval, the STFC-SCUF merger appears on track to close in October 2022. The merger may have synergy benefits, but the extent to which these may be realized is uncertain. Despite cyclical tailwinds in second-hand CV, SHTF’s broad base should limit growth in its assets under management Cost of credit normalization should lift FY23 earnings, but EPS growth should decline thereafter. Potential equity supply risk to shareholders of the merged entity may be an overhang,” Jefferies said in a note.

The global brokerage firm expects the integration to go smoothly. HR integration is largely complete and technology platforms have been aligned. Shriram is targeting synergy gains of around 10% primarily through cross-selling gains and a lower cost of funds at SCUF (SCUF IN, NC) due to an improved credit rating.

While there may be synergy benefits, Jefferies sees execution challenges. Branch employees will need to be trained/re-qualified to cross-sell/underwrite new products. Given the disparate products, the cross-selling potential of some products (such as HCV) may be low.

“We are reducing our FY23-25E EPS by 6-8% as we reduce our margin guidance. Continued underperformance of Shriram Transport Finance with a price target of 990,” he said.

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

“With the vote of shareholders and creditors, there are only a few more steps before the agreement can be concluded. We are close to the starting line of a new era for Shriram where we are building a fairly diversified loan portfolio. , which can withstand the test of economic and credit cycles from a growth and asset quality paradigm,” STFC Vice President and Managing Director Umesh Revankar said in the statement.

The opinions and recommendations made above are those of individual analysts or brokerage firms, and not of Mint.

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