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“Marriages in India are forever, they do not come with exit clauses,” says Ajay Piramal, chairman of the Piramal Group on sealing his long-term partnership with the Shriram Group. On Thursday, Piramal and Shriram Group's founder R Thyagarajan announced that the former's company was acquiring a 20-per cent stake in Shriram Capital for Rs 2,014 crore, valuing the company at Rs 10,000 crore. Unlike the Vodafone investment, this is a long-term partnership that Piramal has struck with the Shriram Group. The partnership seeks to create a financial services powerhouse, which will not only be present in India but also overseas.
The promoters of Shriram envisage a three-way partnership between themselves, Piramal Enterprises and South Africa's life insurer Sanlam. Shriram Capital is the group's holding company, which houses the insurance and financial services businesses. Under the current arrangement, Shriram Capital will put in fresh capital amounting to 10 per cent and promoters of Shriram Ownership Trust will dilute another 10 per cent in favour of Piramal Enterprises. After the dilution, Sanlam will see its 26-per cent stake decline to 23 per cent and the stake of Shriram Ownership Trust's stake will decline to 47 per cent from 64 per cent.
However, the idea is to create an entity where all three partners have an equal stake. Shriram Group's Thyagarajan says: "We believe that partnerships should be equal and over time, all three partners will have equal stakes. We had suggested that TPG should sell their stake to Piramal at this point of time and they would have exited from company at this point of time, had it not been for the rupee's depreciation." If TPG had exited at current valuation it would have earned merely three-four per cent returns after factoring in the rupee's depreciation. Had it not been for the depreciation in the rupee, TPG would have earned 18 per cent returns on its investment at current valuations.
This explains the right of first refusal (RoFR) that has been included in the deal, such that Piramal Enterprises will have the right of first refusal (RoFR) in case private equity investor TPG or any other investor chooses to exit the company. This would enable Ajay Piramal to increase his stake from the existing 20 per cent to 30 per cent.
Sanlam, too, has expressed its desire to increase its stake in the company, but has not been able to do so for regulatory reasons. In time, both Piramal Enterprises and Shriram Capital may consider having cross holdings in each other's financial services businesses and even a merger. Explaining the rationale behind the deal, Piramal said: "If India has to grow, financial services has to grow. We expect financial services to grow by 17 per cent in times to come. This is a long-term relationship and will grow from one level to the next in time. Together we want to create excellence in financial services."
The group's investment rationale is driven by the growth potential in the financial services business and the Shriram group's presence in the high growth retail market. Piramal said once the economy picks up, Shriram will grow at least at the rate of 17 per cent per annum due to the demand of good financial products in the country. Shriram Capital's operating entities have 53,000 employees across 2,600 offices, net profit of Rs 800 crore with assets under management of Rs 78,000 crore.
The Shriram group's insurance business includes both a general and life insurance company contributes about 15 per cent to the group's revenue and has been generating profit since its inception. The commercial vehicle financing business contributes over 60 percent of its revenue.
"We plan to extend (our) footprint in insurance area in India and neighbouring countries. Our partners Sanlam too has a similar objective to grow business in India and Asia,'' Thyagarajan says.
A few years ago, Shriram had picked up a stake in Monarch Insurance Company in the Philippines and is looking to expand the business in Vietnam, Indonesia, Bangladesh and other countries. Thyagarajan said it was important for Shriram to get outside investors in order to grow its businesses. On bank licences, Thyagarajan said the company will re-apply as and when the Reserve bank of India (RBI) comes out with new guidelines on differentiated banking.
There will also be synergies between the Piramal Group and Shriram Capital. Thyagarajan says: "We are organisation builders. He (Piramal) is an entrepreneur. This is a good combination.'' The deal also allows the Piramal group to control the commercial vehicle financing business in which Shriram group is a market leader. Piramal conceded he would not have been able to grow vehicle financing business on his own without a partnership with Shriram.
