Earnings upgrade ahead for Shriram Finance as MUFG deal boosts capital base

MUFG Bank's Rs 39,620 crore preferential investment could lift Shriram Finance's capital ratios, support faster AUM growth and a rating upgrade, though RoE may dilute near term

Japanese lender MUFG Bank will invest ₹39,620 crore in Shriram Finance Ltd (SFL) through preferential allotment of equity shares, at ₹841 per share at a post-money valuation of 1.8 times price-to-book value. The deal will strengthen Shriram Finance’s capital base, improve its balance sheet resilience and provide long-term growth capital. This is about 66 per cent of September 2025 net worth and the largest foreign direct investment (FDI) deal in the banking, financial services and insurance (BFSI) sector. On conclusion of the deal, the promoter stake will fall to 20.3 per cent vs 25.4 per cent in September 2025, despite no stake sale from the promoter. 

 

MUFG Bank is Japan’s premier bank, with a global network spanning around 50 countries. MUFG Bank’s parent is Mitsubishi UFJ Financial Group, Inc with a legacy of over 130 years in India. MUFG will hold 20 per cent of SFL and the net worth will be boosted by 66 per cent on completion of the deal.

 

The Tier-I capital adequacy ratio will increase by at least 1,100 basis points to 31 per cent from around 20 per cent. Capital adequacy ratio may see a boost of up to 15 per cent post the equity infusion with Tier-I rising to 36 per cent. There will very likely be a rating upgrade. 

 

The rating boost will improve access to debt and reduce the cost of funds. Of course there will be a drop in return on equity or RoE to around 12.9 per cent from 16.5 per cent earlier. The proposed investment is subject to shareholder approval and regulatory clearances. 

 

The deal gives MUFG the right to appoint two nominee directors to the board of SFL. SFL clarified that it will not be seeking a bank licence. The premier Japanese bank can bring expertise to bear on various aspects of SFL’s operations and business model and this may be a big positive though it cannot be quantified. 

 

The capital infusion will support SFL’s business expansion in the segments such as commercial vehicles and micro small and medium enterprises. It will support the development of road transport infrastructure, which is essential to India’s growth, and contribute to financial inclusion.

 

Assuming the deal consummates in FY27, SFL’s net worth may rise to ₹1,13,256 crore vs ₹56,281 crore in FY25 and ₹60,404 crore in September 2025, also pushing up Tier-I and capital adequacy ratio providing more growth capital for SFL. Potential improvement in cost of funds or CoF coupled with lower incremental borrowings may drive SFL’s margins higher by about 80-90 basis points over FY27-28.

 

In turn, improvement in margins plus steady operating expenditure ratios and controlled credit costs should drive return on assets or RoA improvement of 30-50 basis points over the medium term. 

 

The entry of a strategic shareholder (though MUFG is classified as a public shareholder) comes at a point where demand is improving in the rural markets and the upswing in the cycle may allow SFL to deliver a consistent and healthy assets under management (AUM) growth over the medium term as capital adequacy will support growth acceleration. A potential rating upgrade, and lower CoF could enable diversification of SFL’s borrowing profile. Analysts will be looking at significant net interest income (NII) and earnings upgrades for FY27 and FY28. 

 

Among the domestic top vehicle financiers, only M&M Financial Services has a AAA rating, while both SFL and Cholamandalam Investment and Finance Company (CIFC)

 

 are rated AA+. SFL’s cost of funds (FY22-25 average) is 73 basis points higher than CIFC. CoF should improve significantly.

 

SFL’s AUM size of ₹2.8 trillion is 41 per cent larger than CIFC and 40 per cent smaller than Bajaj Finance. Its historical three-year AUM annual growth is 18 per cent, vs 28 per cent and 31 per cent for BAF and CIFC, respectively and BAF and CIFC’s growth guidance are at over 20 per cent in the near term. The capital infusion may enable acceleration and diversification.

 

The market response was positive with the share price up 3.5 per cent and analysts consensus seems strongly positive.