Shriram group hopes to move to the next level with IDFC merger deal

Mumbai: When R. Thyagarajan, 80, founded a chit funds business over four decades ago, he did not expect it to grow to a $16-billion (by loan book) financial conglomerate that would weigh on him even after he stepped down from formal roles.

Forty-three years after its founding, the Shriram group stands on threshold of merging its identity with the IDFC Group, which Thyagarajan sees not only as natural progression for a non-banking financial company (NBFC) with a large asset size, but also an answer to take it to the next level as rules got stricter. He also believes it will solve the succession planning problems of the group.

The Shriram Ownership Trust, an employee trust, holds a 45% stake in Shriram Capital, the flagship of the group. Thyagarajan, who has been described as a social entrepreneur, wants another entrepreneur to take charge and hand over his legacy.

“I have been looking at succession for the last 10 years, an efficient succession that meets the needs of the community, employees and customers,” he said. “We had a lot of people to run the financial services business. What we need in the long run was entrepreneurial-decision taking person who will think and act entrepreneurially. Otherwise it will be managing the status quo. Every organization that has to survive in the long run has to change its course.”

The first step towards that happened when Piramal Enterprises Ltd started buying and eventually increasing its stake in Shriram group companies with Ajay Piramal taking over as chairman in 2014. This happened at a time when the Chennai-based group failed to get a universal bank licence.

Not everyone agreed with Thyagarajan’s choice. There were many changes in management structure. For instance, Umesh Revankar, who headed leading group company Shriram Transport Finance Co. Ltd, was replaced by another old timer J.S. Gujral, only to be brought back again. R. Sridhar, credited with building the truck financing business, resigned from the executive role in Shriram Capital.

An email sent to Piramal’s spokesperson was not answered.

At the same time, the business growth was feeling the effects of a large base. For instance, the assets under management of Shriram Transport Finance grew 14% annually between fiscals 2014 and 2017 while the bad loans ratio shot up to 8.16%. For the retail focused Shriram City Union Finance, loan book growth was higher at 16%, but still fell short of competition. Thyagarajan himself sees earnings per share growth limited to 10-15% per year for Shriram Transport.

In 2016, Piramal brought in consultant McKinsey to chart a growth and turnaround strategy. But clearly that doesn’t seem to be enough.

IDFC-Shriram merger not an attempt to enter banking through the backdoor: Ajay Piramal

Venturing into banking was seen as the next option even if the group had failed in the first attempt.

In a conference call with analysts on Friday, Shriram Transports’ chief Umesh Revankar said the groups had complementary strengths—Shriram in retail and IDFC in corporate. He also said that merging with IDFC will lower cost of funds for the NBFC, besides pointing out newer revenue streams from cross-selling products.

However, analysts and minority shareholders aren’t buying this argument pointing out to the complex structure. The plan calls for Shriram City Union Finance to be merged with IDFC Bank, and for Shriram Transport to become an unlisted subsidiary of IDFC Ltd which will also own the insurance arms. Shriram Transport shares have lost 5.5% since the merger announcement while Shriram City Union has shed 9.3% in a week when the broader market scaled new highs.

“The merger approval process itself could take 12 months and another two years for integration. Technology and cultural integration will be a significant challenge. Business could suffer during this period. There could be brand confusion—both the brands will coexist. There could be exits of some important staff members of Shriram group in our view,” said Suresh Ganapathy, an analyst at Macquarie Research Equity, in a note to clients on 10 July.

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