A founder who drives a Santro to the cross-selling of products to a huge customer base are just some of the reasons why PE investors and other firms love investing in this company
Shriram Capital is the undisputed destination of choice for private equity (PE) players in India. As of today, 23 PE investors have invested over $750 million in Chennai-based Shriram Group since 2005 according to Venture Intelligence, a research firm that tracks PE investments in India.
So, why is the Shriram Group the darling of PE outfits?
R Thyagarajan, founder of the Group, has a simple answer, “We treat all investors including minority investors as partners. We believe that all of them should benefit as much as we shareholders benefit. There is, therefore, a unique convergence of objectives leading to a win-win situation all the time. ”
In general, industry insiders say that the Group functions in a niche area which gives them good volumes, higher and superior yield and minimal credit loss of two per cent. It’s been able to get into areas which banks and other financial institutions have been wary of, such as financing for small truck owners.
Shriram Group’s numbers aren’t too shabby either. In the last 7 to 8 years, the Group’s financial businesses grew almost 50 times in market capitalisation—which is sweet music for any PE player. Plus, earnings per share (EPS) for an investor in Shriram Transport Finance Corporation (STFC) (which gives Shriram Capital up to 70 per cent of its profits) was Rs 11.01 in 2006-07, soaring to Rs 54.49 in 2010-11, an increase of almost 395 per cent.
Shriram’s goldmine
In order to further understand the Shriram Group’s allure, it is worth reviewing its sprawl of businesses. The major parts of PE investments are in the Group’s finance businesses—of which Shriram Capital is the holding company—and include STFC, Shriram City Union Finance Ltd (SCUF) and Shriram Retail.
| DEAL MONSTER Major investments made in Shriram Group since 2004 | ||||
| Company | Company Type | Investors | Amount ($M) | Date |
| Shriram Retail Holdings | Unlisted | TPG Capital | 120 | 8-Sep |
| Shriram Transport Finance | Listed | TPG Newbridge | 100 | 5-Sep |
| Shriram City Union Finance | Listed | ChrysCapital, ICICI Venture, Bessemer, Asiabridge | 65 | 8-Apr |
| Shriram City Union Finance | Listed | ChrysCapital, CPIM Funds, Merrill Lynch Real Estate | 43 | 6-Nov |
| Shriram City Union Finance | Listed | Norwest | 25 | 9-Jul |
| Shriram Transport Finance | Listed | ChrysCapital | 13 | 5-Feb |
| Shriram City Union Finance | Listed | Norwest | 3 | 9-Aug |
| Shriram Transport Finance | Listed | Reliance Capital | 1 | 4-Jun |
| Shriram Transport Finance | Listed | FMO | 1 | 4-Oct |
| Source: Venture Intelligence | ||||
The real secret behind the Group’s success are its customers. Their current consumer base stands at 3.5 million and over the last 30 years, the Group has catered to around seven million of them. Shriram Chits alone has disbursed over Rs 50,000 crore to chit subscribers and SMEs. These Chit fund customers, according to Sundararajan, are the base for the Group, and represent the company’s goldmine. “Today 70 per cent of the general insurance company’s products is sold to existing customers, mainly truck owners. Similarly, 50 per cent of life insurance products and one third of retail products of SCUF are sold to the existing Chit customers,” adds Sundararajan.
Overall, 16 to 18 per cent of revenues of Shriram Capital comes from the same customer base, compared to the industry average of around five per cent. “This brings down the cost of acquiring new customers in a big way,” said Sundararajan. The company says that on average an agent makes at least 10 calls to convert a query or a potential buyer to a customer. Whereas in Shriram, it takes only about three calls, since the agent already knows the customer. Another inherent advantage: the strong network of collection agents of Shriram Chits.
While South African insurer, Sanlam Group, isn’t a PE investor it has earmarked ZAR 2 billion (around Rs 1,270 crore) to buy 26 per cent in Shriram Capital Ltd. Its CEO, Johan van Zyl, recently echoed the advantages that Shriram is able to leverage in an online blog. “We’ve been working with the Group for about five years and we like what we see. There are a lot of synergies between the businesses we are invested in, so instead of just holding 26 per cent at the subsidiary level, we have now rolled up our interest up to the top level,” said Zyl.
All about people
Sometimes, the type of people employed by the company—and how many years they’ve logged there—can often be a good indicator of the kind of company it is. Today, all the seven CEOs of the financial businesses of the Group have been with it for over 25 years. K Ramakrishnan, executive director & Head— Investment Banking, Spark Capital, who has tracked the company for 16 years says that “It has grown with home-grown leaders, and has generally stayed away from high-profile recruitments.” In fact, some of the branch managers joined as clerks in the company. “We are cost-conscious and have a fugal management policy. We do what the customer wants. This low- cost approach has helped sustain us,” said Sundararajan.
For starters, Thyagarajan himself does not have a cell phone and drives a Hyundai Santro. In November 2006, Thyagarajan decided to share his wealth with his management team, who were driving the Group. He floated two Trusts—Shriram Ownership Trust and Shriram Enterprise Trust. Through these trusts, 75 per cent of the promoter’s holding is transferred to those in management team upon their retirement, thereby making them owners of the Group. “We aren’t focusing all the time on what our share (of the equity) should be. That’s because there isn’t a promoter family or anything like that behind the Group,” said Thyagarajan in an interview. The overarching philosophy seems to have worked. Attrition rate in the financial service businesses of the Group is around 12 to 15 per cent, versus the industry average of 40 per cent.
Fat returns
Ultimately, all of Shriram’s unusual traits have manifested themselves into handsome money for its investors. In 2005, ChrysCapital invested Rs 100-120 crore in STFC and exited in 2009 for a cool Rs 1400 crore, 11 to 12 times what they put in. The Texas Pacific Group, which invested around Rs 550-600 crore in two tranches and is currently planning an exit in the next few months, is estimated to make 5 to 6 times its original investment. Citi Financial which slapped down Rs 11 crore exited with Rs 200 crore.
Apparently, the Group is now suffering from too much interest in it, and is having to pick and chose investors, such as Japan-based Orix Corporation which wants to fill in the gap left by TPG’s exit.
PE firms such as LeapFrog, which placed Rs 67 crore into Shriram CCL, a financial services distribution company in September 2011, are fans for a few different reasons. Jim Roth, co-Founder of LeapFrog said that his firm’s investment is important because it “will have enormous impact, by financing and improving cover for lakhs of financially-excluded clients and their families. It also gives good returns.”
Now, if only all promoters drove small cars.