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A multi-crore deal always makes news. It generates a buzz and piques interest. No wonder, the Rs 2,014-crore investment made last week by Piramal Enterprises in the Shriram Group aroused the curiosity of the industry. Why would a conservative South Indian company agree to a marriage with a Marwari go-getter?
The Rs 60,000-crore Shriram Group has always been the darling of global private equity investors, so it is believed that Ajay Piramal's decision to invest is a strategic step and the analysts agree that this will be mutually beneficial for both the parties.
The deal was initiated by the Shriram Group's 77-year-old founder, R Thyagarajan, himself. Says G S Sundararajan, group director, Shriram, who was one of the senior officials representing the financial services company in talks with Piramal Enterprises: "The whole thought processes and DNA of the Shriram Group will get a positive change and this will help it look at opportunities that it has never considered earlier. It will be a paradigm shift, but it won't be at the cost of the group's philosophy." He says that the Piramal-Shriram agreement will prove a game changer over the coming 7-10 years.
Thyagarajan was keen to rope in a partner who had long-term vision and could stay the course with his group, preferably an Indian and someone who had an untainted record. Piramal ticked all the boxes.
"The fact is, whether we like it or not, the Shriram Group is still tagged as a South-based company," says Sundararajan. "We needed a prominent partner who could help us to take the brand national. Piramal's stature has the potential to enhance Shriram's pan-India image."
There is concurrence on this point in many quarters. Says K Ramakrishnan, executive director & head (investment banking) of Chennai-based investment bank Spark Capital, who has been tracking the group for almost a decade: "This will be a win-win deal for both." Piramal, says Ramakrishnan, is a businessman who has funds that Shriram needs and can contribute to that company's growth in the "capacity of an anchor investor". In return, Piramal gets a "fabulous platform" for his ambitions in financial services.
Shriram Capital through its non-banking financial services arms - Shriram Transport Finance Corporation and Shriram City Union Finance -could help Piramal Enterprises consolidate its presence in the banking sector. The two NBFCs of the Shriram Group together have assets worth Rs 65,000 crore under management. Where Piramal could benefit from is Shriram's extensive reach in small towns and rural areas. The group has been offering high-risk retail loans to people in the villages who are unable to comply with the stringent documentation that is required for faster disbursement of loans, but it has still been able to maintain a healthy asset quality because of its strong understanding of the customers, says CRISIL. The loans are mostly given to existing customers who have a good repayment record or have a relationship with the group's chit fund business. As growth is hard to come by in urban areas and the real opportunities are knocking in rural areas where Shriram has a strong presence, the deal could help Piramal scale up its banking ambitions in quick time. At the same time, the South Indian company, which is currently hobbled by its limited presence in the lucrative north-Indian market, could use the investor's extensive brand reach to expand its market to newer areas.
A day after the deal was announced, Piramal and Thyagarajan had both spoken to Business Standard. Piramal has talked of how the Indian economy was starved of capital. With Reserve Bank of India getting tougher even as the banking sector had a large overhang of non-performing assets, banks were becoming hesitant to lend. "Many do not have enough capital. Can the government keep funding them? As far as such companies are concerned, even public markets are not supportive," he had said. "It is, then, institutions like ours that can meet the funding gap."
For his part, Thyagarajan had described Piramal's injection of funds into his group as the "coming together of entrepreneurial talent" to help it build bigger institutions. He had said, "It will bring support to business areas that our people may have thought as adventurous. To give an example, expanding the insurance business in Thailand. There is a hesitation from our side, as we are not entrepreneurs. This could now change."
To a question on whether a conservative group like Shriram can work with an investor like Piramal, Ramakrishnan says that the Chennai-based company has demonstrated over the years its capacity to work with external investors, creating value for investors while benefiting from the injection of investment funds. "The group is already tuned to the concept of external shareholders," he says.
While the Piramal Enterprises chairman is said to have had initial misgivings over the management structure of Shriram, he soon realised that it had a professionally-run set-up and led by committed individuals. It needed a new direction, however, and the time seemed just right for such an event. "In over 30 years, the group has been frugal and grown organically," says Sundararajan. "But it needed a change and this was the correct moment to bring in a new partner who had both money and value."
An important strategy now would be for the Shriram Group to go in for inorganic growth. The group can contemplate acquisitions in rental and equipment businesses through Shriram Transport Finance Corporation, in housing finance through Shriram City Union Finance, and in micro-, small- and medium enterprise and business processes outsourcing companies through Shriram Value Service, a captive BPO arm of Shriram Group.
As Thyagarajan had disclosed, the group also has an eye on the insurance sector, not only in Thailand, but also at home. "Foreign investors want to exit from their insurance joint ventures. We can look at them, though valuation will be an issue," says Sundarajan. Shriram would prefer smaller companies because the large entities came with their own baggage, like due diligence. Integration of smaller companies could also be easier.
Without this sort of inorganic growth, Shriram could grow at 15-20 per cent. It has the potential to double its size in the long term as well as increase market share of its arms. At present, except for Shriram Transport, all the other group companies have marketshares less than 10 per cent in their respective businesses.
The group is not looking at any more strategic partners, though Shriram Transport and Shriram City Union Finance might consider new investors later. South Africa-based Sanlam and Piramal Enterprises will be the two strategic partners for Shriram Capital, the holding company for all financial businesses of the group. Thyagarajan wishes that at some point, the three partners should have equal stakes in the company.
At present, there are 22 private equity investors in the Shriram Group. They have collectively invested around Rs 4,000 crore in the company. US-based TPG is the biggest investor and cumulatively holds around 14 per cent stake. According to industry sources, its investment may be worth at least 3.5 times bigger now.
