Shriram Transport: Analysts see limited near-term synergy post merger

Street has reckoned Shriram Transport Finance Corporation as an indirect play on the CV cycle - this appeal will reduce post the potential merger, analysts said

Shares of Shriram Transport Finance plunged 7 per cent intra-day, to Rs 1,371 on the BSE on Tuesday, as most analysts saw limited upside for the company post its proposed merger with Shriram Capital and Shriram City Union Finance.

This was on the back of limited scope for synergies given the varied nature of operating business segments and underlying customer base, analysts said.
 

"Given operationally challenging and diverse operations – Shriram Transport Finance has branches outside city while Shriram City Union Finance has local presence – immediate synergies are hard to come by," highlighted Prakhar Agarwal and Parth Sanghvi, analysts at Edelweiss Securities.
 

On Monday, the Group announced that Shriram Capital and Shriram City Union will merge into Shriram Transport and the merged entity will be called 'Shriram Finance Limited'.
 

The merged entity would have a combined asset under management (AUM) of over Rs 1.5 trillion, over 20 million customers served till date, and a distribution network of over 3,500 branches (including rural centers). 

As per the deal, shareholders of SCUF will receive 1.55 shares of SHTF for each SCUF share. Further, shareholders of SCL will receive 1 share of SHTF for each share held by SCL in SHTF.

The Group shared that it expects the whole process including regulatory filings, NCLT filings and ROC filings and the respective approvals to come through over the next eight-ten months and expects the whole process to be completed by October or November, 2022.

However, analysts at Kotak Institutional Equities see the merger having "no real impact" as post the demerger of the non-lending entities, SCL will be left with only two holdings (26 per cent stake in STFC and 33.9 per cent stake in SCUF).

Financially, too, analysts see no immediate impact on the entities in the near-term.

"Pro forma return ratios of the consolidated entity will remain broadly stable with return on asset (RoA) of 2.9 per cent and return on equity (RoE) of 14.9 per cent as of FY24E compared to 2.8 per cent and 14.6 per cent, respectively for STFC, although a tad lower than 3.5 per cent and 15 per cent for SCUF," analysts at KIE said.
 

Further, a section of the Street has reckoned STFC as an indirect play on the CV cycle – this appeal will reduce post the potential merger, they added.
 

For those at Edelweiss Securities, the management’s expectation to increase cross-sell given wider product offerings, would not be as forthcoming given parallel customer base and softer challenges (employee training for cross-sell etc).

"Management expects a 10 per cent profitability gain, which we believe could be hard to achieve, given existing efficiency, and limited asset overlaps," Agarwal and Sanghvi of Edelweiss said.
 

Global brokerages CLSA and Jefferies, too, see limited upside synergies as "positives for STHF are partly diluted by 15 per cent premium paid to acquire SCUF’s stake".
 

CLSA sees 1-4 per cent earnings per share (EPS) dilution and 3 per cent book value per share (BVPS) dilution for SHTF post the merger.
 

The third concern that Jefferies pointed out was possible stake sale by non-promoters. 

"A possible stake sale by Piramal Enterprises and TPG, which own 8.47 per cent and 2.6 per cent, respectively, in the merged entity, remains an overhang," concurred Manjith Nair, research analyst at Emkay Global.
 

That said, the proposed merger does remove a key overhang from the stock and may result in long-term benefits, say analysts.

"While this merger will indeed give the merged entity a larger canvas in the lending space, it will further improve the capital adequacy and allow more productive use of capital (especially in SCUF)," said analysts at Motilal Oswal Financial Services.

In addition, given the diversified product mix of the merged entity, credit rating agencies could potentially look more favorably at the rating of the merged entity and over a period of time, there could be a case for a credit rating upgrade, they said.

Nair of Emkay added by removing the unlisted operating entities from the merger scheme, some of the market concerns have been alleviated. 

"While management expects Rs 200 crore in one-time integration costs, the benefits from the merger in terms of better cross-selling prospects improve the growth outlook for the firm over the medium-term," he said.