For Shriram group’s investors, the ‘marriage’ isn’t value accretive

Street doesn't see synergies for the two Shriram Group firms from the merger with IDFC group

The mega-merger announced between IDFC Limited, IDFC Bank and Shriram group companies on Saturday is perhaps the most ambitious deal announced in recent times. Terming it a “marriage made in heaven”, Rajiv Lall, CEO, IDFC Bank, said the deal would create India’s largest retail bank. Yet, investors aren't impressed. Shares of the Shriram Group twins — Shriram City Union Finance (SCUF) and Shriram Transport Finance Company (STFC) — were among the top losers on the BSE, down over 3-5 per cent on Monday when the Sensex was up 355 points or by 1.1 per cent. Even shares of IDFC Limited (IDFC) dipped by over 3 per cent, while those of IDFC Bank managed to close in the green.

Scepticism largely circled on who really benefits from this mega-merger. There aren’t many who think SCUF and STFC could gain from it. On STFC, the current contours suggest it would be merged with IDFC to operate as its subsidiary. After the merger, STFC would operate as unlisted entity and its shareholders would receive shares of IDFC in exchange. But this may not be any good, say analysts. “A key thing to watch for is, whether shareholders looking to own a moat commercial vehicle financing business would like to hold shares of a holding company with stakes in diverse businesses in nonbanking finance company (NBFC), banking, asset management and insurance,” analysts at Motilal Oswal said. Suresh Ganapathy of Macquarie Capital said unless the shareholders of STFC are compensated in terms of a huge premium, they should oppose the deal.

As for SCUF, the concerns are clear and pertain to substantial dilution in return profile. For a diversified loan book (gold, housing, auto, personal and SME loans) of ~22,847 crore, SCUF commands a premium at 3.3x price to book value. Return on equity of 12.3 per cent and return on assets of 2.5 per cent is among the best in class. According to Kotak Institutional Equities, these ratios may dip to 9.1 per cent and 1.3 per cent respectively (based on FY18 estimates) after the proposed merger, explaining Monday’s stock price reaction.

Not all is good even for IDFC. Analysts at Motilal Oswal highlight the merger of STFC and other businesses of Shriram Capital such as insurance and asset management would entail more than 75 per cent equity dilution for IDFC. Share swap with STFC at current market price would make IDFC’s existing shareholders 30 per cent shareholders of the merged entity, the brokerage said.

Thus, IDFC Bank seems to be the only beneficiary as a merger with SCUF would fast-track its asset side diversification. But then, how this would benefit in mopping up low-cost deposits needs to be seen.

Therefore, with lack of compelling synergies in the deal for both parties, the Street isn’t too happy with the transaction.