Shriram regroups for the future with succession plan, business integration

Recently, a member from the family of one of the founders of the Shriram Group posted the Chennai-based financial conglomerate’s old vision: “Creating wealth, professionally managed.”

This month, the management of the group with revenue of over Rs 1 trillion stood by this vision by creating a durable succession management model and restructuring itself into a streamlined entity through the setting up of a new body via the merger and demerger of several businesses. Family members were always discouraged from joining the business. The downside of this, as critics have pointed out, is that there was no clear succession plan in place, a situation made worse by the complex cross-holding structure across the group.

These were the key problems that group founder R Thyagarajan sought to address by appointing a four-member board to the 15-year-old Shriram Ownership Trust (SOT), which owns close to 30 per cent in the group holding company Shriram Capital. The SOT will have as its board members D V Ravi, managing director (MD) of Shriram Capital; Umesh Revankar, MD of Shriram Transport Finance; Jasmit Gujral, MD of Shriram General Insurance; and R Duruvasan, former MD of Shriram City Union Finance.

Though this may represent a genuine professionalisation of the group’s management, the bigger issue remains the opaque structure. Streamlining this was critical as the group also wanted to facilitate a smooth exit for existing investors and bring in new ones. In 2013, Piramal Enterprises, the diversified Mumbai-based conglomerate owned by Ajay Piramal, bought a 9.9 per cent stake in Shriram Transport Finance, one of the group’s more profitable operations, as part of an initial step to take over the company. Later, Piramal took over as chairman of the group, and a top-level reshuffle in 2016 saw thousands of people leaving in a span of six months.

In July 2017, Piramal proposed a merger between Shriram Capital and IDFC Bank, a deal that was called off a year later because the Chennai-based non-banking finance company (NBFC) did not agree to the swap ratio. By June 2019, Piramal decided to exit the group. The restructuring was partly done to enable the exit of Piramal and TPG, which had invested in the group in the middle of the last decade. To this end, the group announced the merger of Shriram Capital Ltd (SCL) and Shriram City Union Finance Ltd (SCUF) with Shriram Transport Finance Ltd (STFC), creating the largest retail NBFC in India named Shriram Finance Ltd (SFL). This merger would bring together all its lending products — commercial vehicles, two-wheeler loans, gold loans, personal loans, auto loans and small enterprise finance.

At the same time, all other businesses of the group — life insurance, general insurance and all non-lending and non-insurance activities — would be demerged from Shriram Capital (see chart).

The merger process will take at least nine months and the new entity could have combined assets under management (AUM) of over Rs 1.5 trillion, more than 20 million consumers and a distribution network of around 3,500. The one-time integration cost is pegged at around Rs 200 crore.

The benefit of integrating businesses within specific structures is obvious. As Deven R Choksey, managing director, KR Choksey Investment Managers, pointed out, “This is a model successfully practised by Bajaj Finance, as they also started as an auto finance company and are now into all the verticals.” More importantly, the move, Choksey added, will bring down the cost of funds and increase the group’s ability to lend to different verticals at an efficient level, bringing in cross-selling opportunities.

“They are making a new business model out of it. This merger will pave the path for giving an exit to the Piramals. Because of the new model (merged entity), any new investor will also be more comfortable investing into it,” he added. Piramal, who was holding a 20 per cent stake in Shriram Capital and 9.96 per cent in SCUF, will hold 8.37 per cent in the merged entity, Shriram Finance.

On the other hand, Fitch Ratings has highlighted that the merger may heighten STFC’s risk appetite and raise asset-quality risks. The agency pointed out that each business targets different market niches with differentiated lending products and requires tailored underwriting skills, which may lead to a higher level of execution risks. “STFC’s used commercial vehicle (CV) underwriting requires vehicle-valuation expertise and a feel for freight market dynamics, whereas SCUF’s varied products — small business, two-wheeler, rural housing, and gold loans — need altogether separate risk assessments. Furthermore, the management’s plan to introduce more technology into its processes is untested, having depended until now on manual procedures,” it said in a report.

There is also a viewpoint that SCUF’s portfolio is likely to weaken the asset quality of the new entity as its unsecured personal, small business and two-wheeler loans carry a greater risk of credit fluctuations.

“They have managed their asset quality decently. The new entity will have a diversified portfolio. A lot will depend on how well sales or credit staff adjust to it and how the integration is managed. The broader level seems good from the transaction point of view,” said Karthik Srinivasan, Senior Vice-President, Group Head, Financial Sector Ratings, ICRA. The gross non-performing loan ratio of STFC stands at 7.1 per cent, SCUF at 6.4 per cent and the merged entity will be around 6.9 per cent (based on March 2021 data).

Many highlight the planned super-app called Shriram One — where all lending, savings and insurance products will be available on a single platform — as a key towards the new integration. Insiders point out that the company always took the lead in terms of technology and was one of the first corporate websites to get registered in the country in the 1990s.

Experts indicate that the succession plan allowing professionals to run the show will also help in this technology drive. As Choksey said, “They are creating a marriage of finance with technology. For that, they need a professional team.”