Shares of Shriram Finance, India’s second largest retail non-bank lender, have been on a roll and hit a life-high on Monday, with investors giving a big thumbs up to Japan’s financial group MUFG Bank’s plans to invest $4.4 in it for a 20 per cent stake. The acquisition will provide fresh ammunition for Shriram Finance to grow faster in its key focus areas – commercial vehicle finance as well as SME (small and medium enterprises) credit.
This will be the largest FDI (foreign direct investment) in India’s financial services sector. According to officials, this investment not only provides huge capital for Shriram Finance’s further growth but also augments its leadership position in the vehicle finance space, while also accelerating growth in other key lending segments.
Officials also hope that this stake acquisition by a major Japanese institution should make a strong case for a potential credit ratings upgrade, which should aid in bringing its costs of funds down over time.
“When we plan for a very long-term equity requirement, I can go to retail or raise funds via QIP (qualified institutional placement), or I can have a partner who is strong enough and big enough so that I can walk a long way. So, we felt that we looked at a very long-term partner and therefore we were looking at an institutional partner,” said Umesh Revankar, executive vice-chairman of Shriram Finance.
He also pointed out that while the capital requirement in India was 15 per cent, the company had also raised funds in the international market via bonds, and international rating agencies typically preferred a 20 per cent capital adequacy. This investment by MUFG will provide a huge capital benefit.
Post this acquisition, the promoter Shriram Group will continue to control Shriram Finance, holding a 20.3 per cent stake. Currently, the promoters hold around 25.3 per cent stake. Public shareholding in the company will also come down to around 60 per cent from the earlier 74.6 per cent. MUFG will be able to appoint two nominee directors to the board of Shriram Finance.
“MUFG positions Asia as our second home market and among Asian countries, MUFG views India as the most strategically important market, given its strong potential for enduring economic growth,” said Yasushi Itagaki, senior managing corporate executive, group COO-I and the group head of global commercial banking business group at MUFG.
Not surprisingly, then, this is MUFG’s second major investment in an Indian financial services company. It had earlier picked up a stake in digital lender DMI Finance back in 2023.
“This investment in Shriram Finance presents a strategic move for MUFG to establish a solid business platform foundation in India’s SME and retail sectors and to capture the country’s growing domestic demand. By providing growth capital to Shriram Finance, we aim to support their business expansion and help improve their funding capacity and profitability through enhanced creditworthiness,” said Itagaki.
MUFG’s investment in Shriram Finance adds to the growing interest among Japanese financial services companies to invest in the banking and finance space in India.
Earlier this year, Sumitomo Mitsui Banking Corp (SMBC) got approval to buy a 24.99 per cent stake in Yes Bank, making it the largest shareholder in the private sector lender. Last week, Mizhuo Securities, a subsidiary of Japan’s Mizhuo Financial Group, acquired a majority stake in investment bank Avendus from investment firm KKR. Elsewhere, Daiwa Securities has a stake in Ambit Capital.
“Many Japanese financial institutions are increasingly showing their appetite for India’s financial market. I am not in a position to talk about our peer company's strategy. But, generally speaking, we have a high appreciation that India and Japan have a very strong trust and mutual respect at the government level and private sector level. This is a very important foundation for us to increase our commitment to the Indian economy,” said Itagaki.
India has been among the fastest-growing major economies in the world. It has a growing middle class and a large young population, which is driving a huge growth in the banking and financial services space. Banks and NBFCs have also cleaned up their balance sheets significantly over the past several years.
On the other hand, Japanese growth stagnated for decades, its population has been declining, and the number of elderly has risen to a record in recent years. It's not surprising that Japanese financial giants are stepping up their presence elsewhere, especially in high-growth markets like India.
“A premier Japanese bank can bring expertise in various aspects of Shriram Finance’s operations and business model; therefore, we see this as a big positive,” said Shreya Shivani of Nomura.
Shriram Finance has assets under management of Rs 2.8 lakh crore. With this large capital infusion, its diversification plan could accelerate, said Shivani, who foresees a big upswing in Shriram Finance’s growth outlook.
Analysts at Motilal Oswal Financial Services also see this deal as a strategically significant and value-accretive development for Shriram Finance.
“MUFG’s investment is expected to support the company’s next phase of growth by providing long-term capital to accelerate expansion across core segments, including CV and MSME lending, while strengthening balance sheet resilience. Over time, this could culminate in a potential credit rating upgrade to AAA for Shriram Finance,” said the analysts.
MUFG’s investment is a validation of the company’s business model and governance framework by a reputed foreign investor, said Dnyanada Vaidya, research analyst at Axis Securities.
“The demand buoyancy in the rural markets and healthy growth visibility across most of the segments bode well for Shriram Finance to deliver a consistent and healthy AUM growth over the medium term. Furthermore, the capital infusion by MUFG provides Shriram Finance with ample opportunity to further accelerate the pace of growth while maintaining adequate capital levels,” said Vaidya.
On Monday, Shriram Finance shares closed up 3.6 per cent on the BSE at Rs 934, while the broader BSE Sensex was up 0.7 per cent (638 points), at 85,567.48. Year-to-date, Shriram Finance shares have surged 60 per cent.
